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MONETARY POLICY IMPLEMENTATION FRAMEWORKS: A COMPARATIVE ANALYSIS

Published online by Cambridge University Press:  22 December 2010

Antoine Martin  and
Cyril Monnet
Antoine Martin
Affiliation:
Federal Reserve Bank of New York
Cyril Monnet*
Affiliation:
Federal Reserve Bank of Philadelphia
*
Address correspondence to: Cyril Monnet, Research Department, Federal Reserve Bank of Philadelphia, 10 Independence Mall, Philadelphia, PA 19106, USA; e-mail: cyril.monnet@gmail.com.
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Abstract

We compare two stylized frameworks for the implementation of monetary policy. The first framework relies only on standing facilities, whereas the second framework relies only on open-market operations. We show that the Friedman rule cannot be implemented when the central bank uses standing facilities only. For a given rate of inflation, we show that standing facilities unambiguously achieve higher welfare than just conducting open-market operations. We conclude that elements of both frameworks should be combined. Also, our results suggest that any monetary policy implementation framework should remunerate both required and excess reserves.

Keywords

Monetary Policy ImplementationCorridor SystemStanding FacilitiesOpen-Market Operations
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Supplement S1: Money, Credit, and Liquidity: Part 1 , April 2011 , pp. 145 - 189
Copyright
Copyright © Cambridge University Press 2010

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