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The operational target of monetary policy and the rise and fall of reserve position doctrine

  • Bindseil, Ulrich
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    Before 1914, there was little doubt that central bank policy meant first of all control of short term interest rates. This changed dramatically in the early 1920s with the birth of “reserve position doctrine” (RPD) in the US, according to which a central bank should, via open market operation, steer some reserve concept, which would impact via the money multiplier on monetary aggregates and ultimate goals. While the Fed returned to an unambiguous steering of short term interest rates only in the 1990s, for example the Bank of England never adopted RPD. This paper explains the astonishing rise and fall of RPD. The endurance of RPD is explained by a symbiosis of central bankers who may have partially sympathised with RPD since it masked their responsibility for short term interest rates, and academics who were too eager to simplify away some key features of money markets and central bank operations. JEL Classification: E43, E52, B22

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    Paper provided by European Central Bank in its series Working Paper Series with number 0372.

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    Date of creation: Jun 2004
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    Handle: RePEc:ecb:ecbwps:20040372
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    1. Ayuso, J. & Repullo, R., 2000. "A Model of the Open Market Operations of the European Central Bank," Papers 0011, Centro de Estudios Monetarios Y Financieros-.
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    3. Axilrod, Stephen H & Lindsey, David E, 1981. "Federal Reserve System Implementation of Monetary Policy: Analytical Foundations of the New Approach," American Economic Review, American Economic Association, vol. 71(2), pages 246-52, May.
    4. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2002. "Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 137-59, February.
    5. Claudio E. V. Borio, 1997. "Monetary policy operating procedures in industrial countries," BIS Working Papers 40, Bank for International Settlements.
    6. Bindseil, Ulrich & Camba-Méndez, Gonzalo & Hirsch, Astrid & Weller, Benedict, 2004. "Excess reserves and implementation of monetary policy of the ECB," Working Paper Series 0361, European Central Bank.
    7. Bindseil, Ulrich, 2004. "Monetary Policy Implementation: Theory, past, and present," OUP Catalogue, Oxford University Press, number 9780199274543, March.
    8. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects and the monetary transmission mechanism," Staff Report 150, Federal Reserve Bank of Minneapolis.
    9. Juan Ayuso & Andrew Haldane & Fernando Restoy, 1997. "Volatility transmission along the money market yield curve," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(1), pages 56-75, March.
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