English, Article edition: Divorcing money from monetary policy Todd Keister; Antoine Martin; James McAndrews

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Physical Description
  • article
Language
  • English

Edition details

Title
  • Divorcing money from monetary policy
Author
  • Todd Keister
  • Antoine Martin
  • James McAndrews
Physical Description
  • article
Notes
  • Many central banks implement monetary policy in a way that maintains a tight link between the stock of money and the short-term interest rate. In particular, their implementation procedures require that the supply of reserve balances be set precisely in order to implement the target interest rate. Because bank reserves play other key roles in the economy, this link can create tensions with other important objectives, especially in times of acute market stress. This article considers an alternative approach to monetary policy implementation -- known as a "floor system" -- that can reduce or even eliminate these tensions. The authors explain how this approach, in which the central bank pays interest on reserves at the target interest rate, "divorces" the supply of money from the conduct of monetary policy. The quantity of bank reserves can then be set according to the payment or liquidity needs of financial markets. By removing the opportunity cost of holding reserves, the floor system also encourages the efficient allocation of resources in the economy.
  • Monetary policy ; Banks and banking, Central ; Money supply ; Bank reserves ; Interest rates
  • RePEc:fip:fednep:y:2008:i:sep:p:41-56:n:v.14no.2
Language
  • English
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