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Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic

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  • Aleksander Berentsen
  • Alessandro Marchesiani
  • Christopher J. Waller

Abstract

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.

Suggested Citation

  • Aleksander Berentsen & Alessandro Marchesiani & Christopher J. Waller, 2013. "Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic," ECON - Working Papers 121, Department of Economics - University of Zurich, revised Sep 2013.
  • Handle: RePEc:zur:econwp:121
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    Cited by:

    1. Keister, Todd & Martin, Antoine & McAndrews, James J., 2015. "Floor systems and the Friedman rule: the fiscal arithmetic of open market operations," Staff Reports 754, Federal Reserve Bank of New York.
    2. Florian Madison, 2017. "Frictional asset reallocation under adverse selection," ECON - Working Papers 261, Department of Economics - University of Zurich, revised Jan 2018.
    3. Chiu, Jonathan & Monnet, Cyril, 2016. "Relationships in the interbank market," Working Paper Series 5210, Victoria University of Wellington, School of Economics and Finance.
    4. Lucas Marc Fuhrer, 2017. "Liquidity in the Repo Market," Working Papers 2017-06, Swiss National Bank.
    5. Aleksander Berentsen & Sébastien Kraenzlin & Benjamin Müller, 2016. "Exit strategies for monetary policy," ECON - Working Papers 241, Department of Economics - University of Zurich, revised Feb 2018.
    6. Hajime Tomura, 2014. "Payment Instruments and Collateral in the Interbank Payment System," UTokyo Price Project Working Paper Series 032, University of Tokyo, Graduate School of Economics.

    More about this item

    Keywords

    Monetary policy; floor system; channel system; standing facilities;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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