Floor Systems for Implementing Monetary Policy: Some Unpleasant Fiscal Arithmetic
Federal Reserve Bank of St. Louis Working Paper No. 2010-049B
45 Pages Posted: 12 Nov 2010 Last revised: 26 Sep 2013
There are 3 versions of this paper
Channel Systems: Why is There a Positive Spread?
Floor Systems for Implementing Monetary Policy: Some Unpleasant Fiscal Arithmetic
Channel Systems: Why is There a Positive Spread?
Date Written: September 23, 2013
Abstract
An increasing number of central banks implement monetary policy via a channel system or a floor system. We construct a general equilibrium model to study the properties of these systems. We find that a floor system is weakly optimal if and only if the target rate satisfies the Friedman rule. Unfortunately, the optimal floor system requires either transfers from the fiscal authority to the central bank or a reduction in seigniorage payments from the central bank to the government. This is the unpleasant fiscal arithmetic of a floor system. When the central bank faces financing constraints on its interest expense, we show that it is strictly optimal to operate a channel system.
Keywords: Monetary policy, floor system, channel system, standing facilities
JEL Classification: E52, E58, E59
Suggested Citation: Suggested Citation
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