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Exit strategies for monetary policy

Author

Listed:
  • Aleksander Berentsen
  • Sébastien Kraenzlin
  • Benjamin Müller

Abstract

In response to the financial crisis of 2007/08, all major central banks decreased interest rates to historically low levels and created large excess reserves. Central bankers and academics currently discuss how to implement monetary policy, going forward. We find that paying interest on reserves (IOR) is optimal if the central bank has full fiscal support. If the central bank has no fiscal support, reducing reserves is optimal. This can be achieved by reserve-absorbing operations which hold the size of the balance sheet constant, or by selling assets which reduces the size of the balance sheet.

Suggested Citation

  • 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.
  • Handle: RePEc:zur:econwp:241
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    File URL: http://www.econ.uzh.ch/static/wp/econwp241.pdf
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    References listed on IDEAS

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    1. Gara Afonso & Ricardo Lagos, 2015. "Trade Dynamics in the Market for Federal Funds," Econometrica, Econometric Society, vol. 83, pages 263-313, January.
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    3. Martin, Antoine & Monnet, Cyril, 2011. "Monetary Policy Implementation Frameworks: A Comparative Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S1), pages 145-189, April.
    4. Sébastien Kraenzlin & Thomas Nellen, 2010. "Daytime Is Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1689-1702, December.
    5. Kraenzlin, Sébastien & Schlegel, Martin, 2012. "Bidding behavior in the SNB’s repo auctions," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 170-188.
    6. Sébastien Kraenzlin & Martin Schlegel, 2012. "Demand for Reserves and the Central Bank's Management of Interest Rates," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 148(IV), pages 531-555, December.
    7. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
    8. Jackson, Christopher & Sim , Mathew, 2013. "Recent developments in the sterling overnight money market," Bank of England Quarterly Bulletin, Bank of England, vol. 53(3), pages 223-233.
    9. Berentsen, Aleksander & Monnet, Cyril, 2008. "Monetary policy in a channel system," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1067-1080, September.
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    13. Aleksander Berentsen & Alessandro Marchesiani & Christopher Waller, 2014. "Floor Systems for Implementing Monetary Policy: Some Unpleasant Fiscal Arithmetic," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(3), pages 523-542, July.
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    More about this item

    Keywords

    Exit strategies; money market; repo; monetary policy; interest rates;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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