Abstract - Implementing Monetary Policy Without Reserve Requirements

We propose a new framework to implement monetary policy in a corridor system, which does not rely on imposing reserve requirements. A main lending facility is introduced, where banks can borrow a limited amount of cash at a rate that we suppose is in the middle of the corridor. There is no maintenance period, so that short term rates
are not affected by an end of period effect. We formally show that this framework will reduce the volatility of the overnight rate relative to systems that use reserve averaging. Also, parameterizing the framework, we show that the variability of the short term rate can be practically eliminated without affecting trading in the interbank market.

Cornelia Holthausen (speaker), Cyril Monnet, Flemming Würtz
European Central Bank
27.May 2008

Back to overview