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Liquidity regulation and the implementation of monetary policy


  • Morten L. Bech

    () (Bank for International Settlements)

  • Todd Keister

    () (Rutgers University)


In addition to revamping existing rules for bank capital, Basel III introduces a new global framework for liquidity regulation. One part of this framework is the liquidity coverage ratio (LCR), which requires banks to hold sufficient high-quality liquid assets to survive a 30-day period of market stress. As monetary policy typically involves targeting the interest rate on loans of one of these assets - central bank reserves - it is important to understand how this regulation may impact the efficacy of central banks' current operational frameworks. We introduce term funding and an LCR requirement into an otherwise standard model of monetary policy implementation. Our model shows that if banks face the possibility of an LCR shortfall, then the usual link between open market operations and the overnight interest rate changes and the short end of the yield curve becomes steeper. Our results suggest that central banks may want to adjust their operational frameworks as the new regulation is implemented.

Suggested Citation

  • Morten L. Bech & Todd Keister, 2013. "Liquidity regulation and the implementation of monetary policy," Departmental Working Papers 201325, Rutgers University, Department of Economics.
  • Handle: RePEc:rut:rutres:201325

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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. M. Vari, 2014. "Implementing monetary policy in a fragmented monetary union," Working papers 529, Banque de France.
    2. Bech, Morten & Monnet, Cyril, 2016. "A search-based model of the interbank money market and monetary policy implementation," Journal of Economic Theory, Elsevier, vol. 164(C), pages 32-67.
    3. Jackson, Christopher & Noss, Joseph, 2015. "A heterogeneous agent model for assessing the effects of capital regulation on the interbank money market under a corridor system," Bank of England working papers 548, Bank of England.
    4. repec:eee:ecmode:v:67:y:2017:i:c:p:193-202 is not listed on IDEAS
    5. Riedler, Jesper & Brueckbauer, Frank, 2017. "Evaluating regulation within an artificial financial system: A framework and its application to the liquidity coverage ratio regulation," ZEW Discussion Papers 17-022, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. Bank for International Settlements, 2015. "Regulatory change and monetary policy," CGFS Papers, Bank for International Settlements, number 54.
    7. Anne-Marie Rieu-Foucault, 2017. "Point sur la fourniture de liquidié publique," EconomiX Working Papers 2017-27, University of Paris Nanterre, EconomiX.
    8. Hlebik Sviatlana & Verga Giovanni, 2015. "The European Central Bank Quantitative Policy and Its Consistency with the Demand for Liquidity," Scientific Annals of Economics and Business, De Gruyter Open, vol. 62(3), pages 425-451, November.
    9. Renzo Rossini & Zenon Quispe, 2015. "Evolution of bank and non-bank corporate funding in Peru," BIS Papers chapters,in: Bank for International Settlements (ed.), What do new forms of finance mean for EM central banks?, volume 83, pages 273-292 Bank for International Settlements.
    10. repec:eee:finsta:v:33:y:2017:i:c:p:311-330 is not listed on IDEAS

    More about this item


    Basel III; Liquidity regulation; Bank reserves; Liquidity Coverage Ratio; Monetary policy;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation


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