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Monetary Policy Independence and the Strength of the Global Financial Cycle

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  • Jonathan Witmer

Abstract

24/7 payment settlement may impact the demand for central bank reserves and thus could have an effect on monetary policy implementation. Using the standard workhorse model of monetary policy implementation (Poole, 1968), we show that 24/7 payment settlement induces a precautionary demand for central bank balances. Absent any changes or response by the central bank, this will put upward pressure on the overnight interest rate in a standard corridor system of monetary policy implementation. A floor system is much less sensitive to this change, as long as excess balances are large enough.

Suggested Citation

  • Jonathan Witmer, 2020. "Monetary Policy Independence and the Strength of the Global Financial Cycle," Staff Working Papers 20-26, Bank of Canada.
    • Handle: RePEc:bca:bocawp:20-26
    DOI: 10.34989/swp-2020-26
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    References listed on IDEAS

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    1. Gara Afonso & Ricardo Lagos, 2015. "Trade Dynamics in the Market for Federal Funds," Econometrica, Econometric Society, vol. 83, pages 263-313, January.
    2. Garth Baughman & Francesca Carapella, 2020. "Voluntary Reserve Targets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(2-3), pages 583-612, March.
    3. Benjamin Lester & Roc Armenter, 2015. "Excess Reserves and Monetary Policy Normalization," 2015 Meeting Papers 586, Society for Economic Dynamics.
    4. Antoine Martin & James J. McAndrews & Ali Palida & David R. Skeie, 2013. "Federal Reserve tools for managing rates and reserves," Staff Reports 642, Federal Reserve Bank of New York.
    5. Michael Boutros & Jonathan Witmer, 2017. "Monetary Policy Implementation in a Negative Rate Environment," Staff Working Papers 17-25, Bank of Canada.
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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