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Monetary policy implementation: Which “new normal”?

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  • Baglioni, Angelo

Abstract

This article provides a simple model of monetary policy implementation, analyzing both the interest rate steering (IRS) and the quantitative easing (QE) policies. The model shows that the “floor system”, introduced with QE policies, is preferable to the traditional “corridor system”, for two reasons. First, it endows central banks with one more degree of freedom, since the interest rate and the balance sheet policies become two independent instruments. Second, it enhances the ability of central banks to keep the money market rates in line with their target level. This second prediction is confirmed by an empirical analysis of the money market in the euro area. Therefore, in the “new normal” monetary policy should be implemented by steering the level of interest rates within a floor system, instead of relying on the corridor system used in the old IRS framework.11I wish to thank the Reviewer and the Editor for their very useful comments on a previous version of this article.

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  • Baglioni, Angelo, 2024. "Monetary policy implementation: Which “new normal”?," Journal of International Money and Finance, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:jimfin:v:141:y:2024:i:c:s0261560623001997
    DOI: 10.1016/j.jimonfin.2023.102998
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    1. Claudio Borio & Anna Zabai, 2018. "Unconventional monetary policies: a re-appraisal," Chapters, in: Peter Conti-Brown & Rosa M. Lastra (ed.), Research Handbook on Central Banking, chapter 20, pages 398-444, Edward Elgar Publishing.
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    3. Friedman, Benjamin M. & Kuttner, Kenneth N., 2010. "Implementation of Monetary Policy: How Do Central Banks Set Interest Rates?," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 24, pages 1345-1438, Elsevier.
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    11. Furfine, Craig H, 2001. "Banks as Monitors of Other Banks: Evidence from the Overnight Federal Funds Market," The Journal of Business, University of Chicago Press, vol. 74(1), pages 33-57, January.
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    1. Dia, Enzo & VanHoose, David, 2025. "Banking and monetary policy in a monetary union," International Review of Economics & Finance, Elsevier, vol. 99(C).

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    Keywords

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    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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