Monetary Policy Implementation in a Negative Rate Environment

Michael Boutros and Jonathan Witmer

Staff Working Papers from Bank of Canada

Abstract: Monetary policy implementation could, in theory, be constrained by deeply negative rates since overnight market participants may have an incentive to invest in cash rather than lend to other participants. To understand the functioning of overnight markets in such an environment, we add the option to exchange central bank reserves for cash to the standard workhorse model of monetary policy implementation (Poole 1968). Importantly, we show that monetary policy is not constrained when just the deposit rate is below the yield on cash. However, it could be constrained when the target overnight rate is below the yield on cash. At this point, the overnight rate equals the yield on cash instead of the target rate. Modifications to the implementation framework, such as a tiered remuneration of central bank deposits contingent on cash withdrawals, can work to restore the implementation of monetary policy such that the overnight rate equals the target rate.

Keywords: Interest rates; Monetary policy framework; Monetary policy implementation (search for similar items in EconPapers)
JEL-codes: E4 E40 E42 E43 G G0 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2017
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:17-25

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