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Liquidity regulation and the implementation of monetary policy

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  • Bech, Morten
  • Keister, Todd

Abstract

We study the impact of the Basel III liquidity coverage ratio (LCR) on interbank interest rates in an otherwise-standard model of monetary policy implementation. When banks face the possibility of an LCR shortfall, the overnight interest rate tends to decrease, while a regulatory premium arises in longer-term rates. In addition, the LCR requirement can substantially alter the effect of a central banks’ open market operations on equilibrium interest rates.

Suggested Citation

  • Bech, Morten & Keister, Todd, 2017. "Liquidity regulation and the implementation of monetary policy," Journal of Monetary Economics, Elsevier, vol. 92(C), pages 64-77.
  • Handle: RePEc:eee:moneco:v:92:y:2017:i:c:p:64-77
    DOI: 10.1016/j.jmoneco.2017.09.002
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    Cited by:

    1. Gara Afonso & Roc Armenter & Benjamin Lester, 2019. "A Model of the Federal Funds Market: Yesterday, Today, and Tomorrow," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 177-204, July.
    2. Jackson, Christopher & Noss, Joseph, 2015. "A heterogeneous agent model for assessing the effects of capital regulation on the interbank money market under a corridor system," Bank of England working papers 548, Bank of England.
    3. Ampudia, Miguel & Beck, Thorsten & Beyer, Andreas & Colliard, Jean-Edouard & Leonello, Agnese & Maddaloni, Angela & Marqués-Ibáñez, David, 2019. "The architecture of supervision," Working Paper Series 2287, European Central Bank.
    4. repec:eee:ecmode:v:67:y:2017:i:c:p:193-202 is not listed on IDEAS
    5. Riedler, Jesper & Brueckbauer, Frank, 2017. "Evaluating regulation within an artificial financial system: A framework and its application to the liquidity coverage ratio regulation," ZEW Discussion Papers 17-022, ZEW - Leibniz Centre for European Economic Research.
    6. repec:wsi:wschap:9789813223400_0013 is not listed on IDEAS
    7. Julia Körding & Beatrice Scheubel, 2018. "Liquidity regulation, the central bank and the money market," DNB Working Papers 596, Netherlands Central Bank, Research Department.
    8. Bech, Morten & Monnet, Cyril, 2016. "A search-based model of the interbank money market and monetary policy implementation," Journal of Economic Theory, Elsevier, vol. 164(C), pages 32-67.
    9. Anne-Marie Rieu-Foucault, 2017. "Point sur la fourniture de liquidié publique," EconomiX Working Papers 2017-27, University of Paris Nanterre, EconomiX.
    10. Renzo Rossini & Zenon Quispe, 2015. "Evolution of bank and non-bank corporate funding in Peru," BIS Papers chapters,in: Bank for International Settlements (ed.), What do new forms of finance mean for EM central banks?, volume 83, pages 273-292 Bank for International Settlements.
    11. M. Vari, 2014. "Implementing monetary policy in a fragmented monetary union," Working papers 529, Banque de France.
    12. repec:eee:glofin:v:39:y:2019:i:c:p:30-38 is not listed on IDEAS
    13. Bank for International Settlements, 2015. "Regulatory change and monetary policy," CGFS Papers, Bank for International Settlements, number 54, July.
    14. Ihrig, Jane E. & Kim, Edward & Kumbhat, Ashish & Vojtech, Cindy M. & Weinbach, Gretchen C., 2017. "How Have Banks Been Managing the Composition of High-Quality Liquid Assets?," Finance and Economics Discussion Series 2017-092, Board of Governors of the Federal Reserve System (US), revised 15 Feb 2018.
    15. repec:eee:finsta:v:33:y:2017:i:c:p:311-330 is not listed on IDEAS
    16. Schmidt, Kirsten, 2019. "Does liquidity regulation impede the liquidity profile of collateral?," Working Paper Series 2256, European Central Bank.
    17. Grandia, Roel & Hänling, Petra & Russo, Michelina Lo & Aberg, Pontus, 2019. "Availability of high-quality liquid assets and monetary policy operations: an analysis for the euro area," Occasional Paper Series 218, European Central Bank.
    18. Hlebik Sviatlana & Verga Giovanni, 2015. "The European Central Bank Quantitative Policy and Its Consistency with the Demand for Liquidity," Scientific Annals of Economics and Business, Sciendo, vol. 62(3), pages 425-451, November.

    More about this item

    Keywords

    Basel III; Liquidity coverage ratio (LCR); Central bank reserves; Corridor system; Floor system; Monetary policy implementation;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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