Channel Systems: Why is There a Positive Spread?

40 Pages Posted: 25 Nov 2010

See all articles by Aleksander Berentsen

Aleksander Berentsen

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

Alessandro Marchesiani

University of Bath - Department of Economics

Christopher J. Waller

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

Multiple version iconThere are 3 versions of this paper

Date Written: November 23, 2010

Abstract

An increasing number of central banks implement monetary policy via two standing facilities: a lending facility and a deposit facility. In this paper we show that it is socially optimal to implement a non-zero interest rate spread. We prove this result in a dynamic general equilibrium model where market participants have heterogeneous liquidity needs and where the central bank requires government bonds as collateral. We also calibrate the model and discuss the behavior of the money market rate and the volumes traded at the ECB’s deposit and lending facilities in response to the recent financial crisis.

Keywords: monetary policy, open market, operations, standing facilities

JEL Classification: E52, E58, E59

Suggested Citation

Berentsen, Aleksander and Marchesiani, Alessandro and Waller, Christopher J., Channel Systems: Why is There a Positive Spread? (November 23, 2010). CESifo Working Paper Series No. 3251. Available at SSRN: https://ssrn.com/abstract=1713686

Aleksander Berentsen (Contact Author)

University of Basel - Economics Department ( email )

Petersgraben 51
Basel, CH-4003
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Alessandro Marchesiani

University of Bath - Department of Economics ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Christopher J. Waller

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/

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