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Implementing monetary policy using a corridor system

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  • Aleksander Berentsen

Abstract

For most central banks, the short-term interest rate in the interbank market (the money market rate) is the operational target. They use two main instruments to influence the money market rate: standing facilities and/or open market operations. For instance, the European Central Bank (ECB) offers a borrowing facility and a deposit facility, and conducts weekly liquidity auctions. Through its borrowing facility, the ECB stands ready to lend cash overnight against proper collateral at a fixed rate – the marginal lending facility rate, or the lending rate for short. With the ECB’s deposit facility, banks with excess cash can make overnight deposits and earn the deposit facility rate or deposit rate. Through its weekly liquidity auctions, banks can obtain cash (against proper collateral) if they bid a rate which is sufficiently high (relative to other bids) and higher than the minimum bid rate set by the ECB. The minimum bid rate can be considered as the ECB’s policy target rate for the shortterm money market rate. JEL Classification: E40, E50, D83

Suggested Citation

  • Aleksander Berentsen, 2006. "Implementing monetary policy using a corridor system," Research Bulletin, European Central Bank, vol. 5, pages 8-10.
  • Handle: RePEc:ecb:ecbrbu:2006:0005:3
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    More about this item

    Keywords

    monetary policy; interest rates;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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