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The Operational Framework of Monetary Policy: A Simple Model

In: Monetary Policy Implementation

Author

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  • Angelo Baglioni

    (Università Cattolica del Sacro Cuore)

Abstract

This chapter provides a model of monetary policy implementation under three operational frameworks. The first one is the traditional interest rate steering—corridor system, based on the active management of a scarce supply of bank reserves. The second is the floor system, relying on an ample supply of reserves: this is the approach introduced with quantitative easing policies targeting the size of central bank’s balance sheet. The third one is the new normal, where the operational target is the interest rate and this is pursued under a floor system: after exiting QE policies, central banks maintain an excess liquidity in the market, albeit lower than before. The decoupling principle implies that, in a floor system, interest rate and balance sheet policies become two independent instruments. Some empirical evidence shows that the floor system is more effective than the corridor system in keeping money market interest rates in line with the announced target level. The chapter also addresses the transmission channels of monetary policy and the potential tensions between financial stability and monetary policy.

Suggested Citation

  • Angelo Baglioni, 2024. "The Operational Framework of Monetary Policy: A Simple Model," Springer Books, in: Monetary Policy Implementation, chapter 0, pages 35-91, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-53885-8_3
    DOI: 10.1007/978-3-031-53885-8_3
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