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

See all articles by Aleksander Berentsen

Aleksander Berentsen

University of Basel - Faculty of Business and Economics; CESifo (Center for Economic Studies and Ifo Institute)

Christopher J. Waller

Federal Reserve Banks - Federal Reserve Bank of St. Louis; University of Notre Dame - Department of Economics

Alessandro Marchesiani

University of Minho - Economic Policies Research Unit (NIPE)

Multiple version iconThere are 3 versions of this paper

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

Berentsen, Aleksander and Waller, Christopher J. and Marchesiani, Alessandro, Floor Systems for Implementing Monetary Policy: Some Unpleasant Fiscal Arithmetic (September 23, 2013). Federal Reserve Bank of St. Louis Working Paper No. 2010-049B, Available at SSRN: https://ssrn.com/abstract=1708127 or http://dx.doi.org/10.2139/ssrn.1708127

Aleksander Berentsen

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Christopher J. Waller (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis

411 Locust St
Saint Louis, MO 63011
United States

University of Notre Dame - Department of Economics ( email )

434 Flanner Hall
Notre Dame, IN 46556
United States
574-631-4963 (Phone)
574-631-9238 (Fax)

HOME PAGE: http://www.nd.edu/~cwaller/

Alessandro Marchesiani

University of Minho - Economic Policies Research Unit (NIPE) ( email )

Campus de Gualtar
Braga, 4710-057
Portugal

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
38
Abstract Views
594
PlumX Metrics