The Corridor’s Width as a Monetary Policy Tool

Guillaume A. Khayat ()
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Guillaume A. Khayat: Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille

No 1735, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: Credit institutions borrow liquidity from the central bank’s lending facility and deposit (excess) reserves at its deposit facility. The central bank directly controls the corridor: the non-market interest rates of its lending and deposit facilities. Modifying the corridor changes the conditions on the interbank market and allows the central bank to set the short-term interest rate in the economy. This paper assesses the use of the corridor’s width as an additional tool for monetary policy. Results indicate that a symmetric widening of the corridor boosts output and welfare while addressing the central bank’s concerns over higher risk-taking in the economy.

Keywords: Monetary policy; interbank market; heterogeneous interbank frictions; the corridor; excess reserves; financial intermediation (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2017-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cta, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:1735

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