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The Corridor’s Width as a Monetary Policy Tool

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Abstract

Credit institutions borrow liquidity from the central bank’s lending facility and deposit (excess) reserves at its deposit facility. The central bank directly controls the corridor: the non-market interest rates of its lending and deposit facilities. Modifying the corridor changes the conditions on the interbank market and allows the central bank to set the short-term interest rate in the economy. This paper assesses the use of the corridor’s width as an additional tool for monetary policy. Results indicate that a symmetric widening of the corridor boosts output and welfare while addressing the central bank’s concerns over higher risk-taking in the economy.

Suggested Citation

  • Guillaume A. Khayat, 2017. "The Corridor’s Width as a Monetary Policy Tool," AMSE Working Papers 1735, Aix-Marseille School of Economics, France.
    • Handle: RePEc:aim:wpaimx:1735
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    More about this item

    Keywords

    Monetary policy; interbank market; heterogeneous interbank frictions; the corridor; excess reserves; financial intermediation;
    All these keywords.

    JEL classification:

    • 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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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