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Monetary policy operational frameworks - a new taxonomy

Author

Listed:
  • Paolo Cavallino
  • Mathias Drehmann
  • Richard Finlay
  • Julie Remache

Abstract

Central banks' operational frameworks are at the heart of monetary policy implementation. Yet the conventional classification falls short of capturing their wider implications for banks' incentives and market outcomes. We propose a new taxonomy based on two key dimensions. First is the marginal opportunity cost of holding reserves, which influences banks' incentives to trade reserves in the money market. Second is the quantity of reserves, which affects how banks manage liquidity risks and comply with regulatory and supervisory requirements. The continuous nature of these dimensions allows for a granular classification of operational frameworks. Applying the taxonomy to real-world operational frameworks uncovers unexpected similarities between distinct frameworks and highlights how similar designs can lead to differing outcomes.

Suggested Citation

  • Paolo Cavallino & Mathias Drehmann & Richard Finlay & Julie Remache, 2025. "Monetary policy operational frameworks - a new taxonomy," BIS Quarterly Review, Bank for International Settlements, September.
    • Handle: RePEc:bis:bisqtr:2509d
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    References listed on IDEAS

    as
    1. Bindseil, Ulrich & Jabłecki, Juliusz, 2011. "The optimal width of the central bank standing facilities corridor and banks' day-to-day liquidity management," Working Paper Series 1350, European Central Bank.
    2. William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
    3. Ricardo Lagos & Gastón Navarro, 2023. "Monetary Policy Operations: Theory, Evidence, and Tools for Quantitative Analysis," NBER Working Papers 31370, National Bureau of Economic Research, Inc.
    4. Blasques, Francisco & Bräuning, Falk & Lelyveld, Iman van, 2018. "A dynamic network model of the unsecured interbank lending market," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 310-342.
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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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