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Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic

  • Aleksander Berentsen
  • Alessandro Marchesiani
  • Christopher J. Waller

An increasing number of central banks implement monetary policy via a channel system or a floor system. We construct a general equilibrium model to study the properties of these systems. We find that a floor system is weakly optimal if and only if the target rate satisfies the Friedman rule. Unfortunately, the optimal floor system requires either transfers from the fiscal authority to the central bank or a reduction in seigniorage payments from the central bank to the government. This is the unpleasant fiscal arithmetic of a floor system. When the central bank faces financing constraints on its interest expense, we show that it is strictly optimal to operate a channel system.

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Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 121.

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Date of creation: May 2013
Date of revision: Sep 2013
Handle: RePEc:zur:econwp:121
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