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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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    References listed on IDEAS

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    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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