Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy

49 Pages Posted: 28 Aug 2019

See all articles by Eric Monnet

Eric Monnet

Banque de France; Paris School of Economics (PSE)

Miklos Vari

International Monetary Fund (IMF)

Date Written: August 2019

Abstract

This paper explores what history can tell us about the interactions between macroprudential and monetary policy. Based on numerous historical documents, we show that liquidity ratios similar to the Liquidity Coverage Ratio (LCR) were commonly used as monetary policy tools by central banks between the 1930s and 1980s. We build a model that rationalizes the mechanisms described by contemporary central bankers, in which an increase in the liquidity ratio has contractionary effects, because it reduces the quantity of assets banks can pledge as collateral. This effect, akin to quantity rationing, is more pronounced when excess reserves are scarce.

Keywords: Central banks, Central banking and monetary issues, Bank credit, Bank rates, Financial management, Specialness, repo market, asset purchases, money market, reserve requirement, interbank, policy tool, government security, liquid asset

JEL Classification: E52, E58, G10, G21, E01, E5, K2

Suggested Citation

Monnet, Eric and Vari, Miklos, Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy (August 2019). IMF Working Paper No. 19/176, Available at SSRN: https://ssrn.com/abstract=3444151

Eric Monnet (Contact Author)

Banque de France ( email )

Paris
France

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Miklos Vari

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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