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Monetary Policy in a Channel System

  • Aleksander Berentsen
  • Cyril Monet

This paper studies the theoretical properties of a channel system of interestrate control in a dynamic general equilibrium model. Agents are subject to liquidity shocks which can be partially insured in a secured money market, or at a standing facility operated by the central bank. We show that it is optimal to have a strictly positive interest rate corridor and that a shift of the corridor affects the money market rate one for one. Moreover, the central bank can tighten its policy without changing its policy rate by simply increasing the corridor symmetrically around the policy rate.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 295.

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Date of creation: Jul 2006
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Handle: RePEc:zur:iewwpx:295
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