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Alternative Monetary Policy Frameworks for Price and Financial Stability

  • Dongkoo Chang
  • Choon-Seng Lim, Vincent
  • Eufrocinio M. Bernabe, Jr.

With revolutionary changes of the financial environment, due in particular to the progress of information and communication technology and the aftermath of the global financial crisis, central banks are facing new challenges in the pursuit of price, financial and exchange rate stability. This research paper looks at how central banks can enhance the effectiveness of monetary policy when in practice, the policy tools available to them are rather limited. In fact, many of them have no better option but short-term interest rates. This paper compares three alternative monetary policy operation frameworks viz. the Channel System, Interest-on-Reserves and Asset-based Reserve Requirements. All the three frameworks have one thing in common - they all allow central banks to preserve their leverage over short-term interest rates and effectively pursue financial stability by controlling the total volume of credit in the economy. However, their practical implementation varies to a large degree.

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This book is provided by South East Asian Central Banks (SEACEN) Research and Training Centre in its series Working Papers with number wp06 and published in 2014.
Handle: RePEc:sea:wpaper:wp06
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  1. Charles Goodhart, 2000. "Can Central Banking Survive the IT Revolution?," FMG Special Papers sp125, Financial Markets Group.
  2. Orphanides, Athanasios, 2013. "Is monetary policy overburdened?," IMFS Working Paper Series 75, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  3. Thomas Palley, 2003. "Asset Price Bubbles and the Case for Asset-Based Reserve Requirements," Challenge, M.E. Sharpe, Inc., vol. 46(3), pages 53-72, May.
  4. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
  5. Thomas Palley, 2007. "Asset-based Reserve Requirements: A Response," Review of Political Economy, Taylor & Francis Journals, vol. 19(4), pages 575-578.
  6. Glick, Reuven & Hutchison, Michael M., 2000. "Foreign reserve and money dynamics with asset portfolio adjustment: international evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 229-247, December.
  7. Thomas I. Palley, 2011. "Monetary Policy and Central Banking after the Crisis: The Implications of Rethinking Macroeconomic Theory," IMK Working Paper 8-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  8. Thomas Palley, 2004. "Asset-based reserve requirements: reasserting domestic monetary control in an era of financial innovation and instability," Review of Political Economy, Taylor & Francis Journals, vol. 16(1), pages 43-58.
  9. Vincent Choon-Seng Lim & Dongkoo Chang, 2013. "Assessing Key Vulnerabilities Post Global Financial Crisis," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp91.
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