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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.

Suggested Citation

  • 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, 2001. "A hundred ways to skin a cat: comparing monetary policy operation procedures in the United States, Japan and the euro area," BIS Papers chapters, in: Bank for International Settlements (ed.), Comparing monetary policy operating procedures across the United States, Japan and the euro area, volume 9, pages 1-22, Bank for International Settlements.
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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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