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Central Bank Money and Interest Rates: Independent Monetary Policy Tools?

Listed author(s):
  • Heinz-Peter Spahn

    (Universität Hohenheim, Lehrstuhl für Wirtschaftspolitik, D-70593 Stuttgart)

Central banks can control the macro economy by means of interest rate policies also in a cashless economy. In a monetary economy with a positive demand for base money, the quantity of money represents an additional policy tool, independent from interest rate management. This hypothesis is examined by analyzing various institutional set-ups of the money market. It is found that the two-instruments hypothesis is valid in a floor, but not in a corridor system (used by Fed and ECB). Here, central banks are led to supply base money on demand, in order to keep effective the chosen policy target rate. If strict stabilization is needed, also in an asset price bubble, monetary policy should consider a “scissors strategy” (sometimes pursued by the Bundesbank) of simultaneously increasing short-term interest rates and permitting temporarily a quantitative shortage of liquidity.

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Article provided by Credit and Capital Markets in its journal Kredit und Kapital.

Volume (Year): 43 (2010)
Issue (Month): 4 ()
Pages: 475-499

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Handle: RePEc:kuk:journl:v:43:y:2010:i:4:p:475-499
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