On the Liquidity Coverage Ratio and Monetary Policy Implementation

Keister, Todd; Bech, Morten L.

On the Liquidity Coverage Ratio and Monetary Policy Implementation

BIS Quarterly Review December 2012

13 Pages Posted: 10 Apr 2013

See all articles by Todd Keister

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics

Morten L. Bech

Bank for International Settlements (BIS) - Committee on Payments and Market Infrastructures

Date Written: 2012

Abstract

Basel III introduces the first global framework for bank liquidity regulation. As monetary policy typically involves targeting the interest rate on interbank loans of the most liquid asset – central bank reserves – it is important to understand how this new requirement will impact the efficacy of current operational frameworks. We extend a standard model of monetary policy implementation in a corridor system to include the new liquidity regulation. Based on this model, we find that the regulation does not impair central banks’ ability to implement monetary policy, but operational frameworks may need to adjust.

JEL Classification: E43, E52, E58, G28

Suggested Citation: Suggested Citation

Keister, Todd and Bech, Morten L., On the Liquidity Coverage Ratio and Monetary Policy Implementation (2012). BIS Quarterly Review December 2012, Available at SSRN: https://ssrn.com/abstract=2206362