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Monetary Policy in a Channel System

  • Aleksander Berentsen
  • Cyril Monnet

Channel systems for conducting monetary policy are becoming increasingly popular. Despite their popularity, the consequences of implementing policy with a channel system are not well understood. We develop a general equilibrium framework of a channel system and investigate the optimal policy. A novel aspect of the channel system is that a central bank can "tighten" or "loosen" its policy without changing its target rate by increasing the interest-rate spread symmetrically around the target rate. This questions the characterization of optimal policy through interest-rate rules, as done in a large body of the literature on the optimal design of interest-rate rules.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-02/cesifo1_wp1929.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1929.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_1929
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