Channel Systems: Why is There a Positive Spread?
40 Pages Posted: 17 Nov 2010
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: November 1, 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: Suggested Citation
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