Demand for central bank reserves and monetary policy implementation frameworks: the case of the Eurosystem

Pontus Aberg, Marco Corsi, Vincent Grossmann-Wirth, Thomas Hudepohl (), Yvo Mudde, Tiziana Rosolin and Franziska Schobert

No 282, Occasional Paper Series from European Central Bank

Abstract: This paper discusses commercial banks’ demand for central bank reserves under two alternative monetary policy framework configurations, namely: (i) an interest rate corridor system with scarce liquidity, and (ii) a floor system with ample liquidity. It outlines the interaction between the monetary implementation framework used to steer short-term market interest rates and banks’ demand for reserves. We find that by implementing a floor system, the Eurosystem has eliminated the opportunity costs of holding reserves and enabled banks to hold relatively large buffers of reserves compared with the corridor system. Additionally, the demand for reserves may have increased endogenously, as the environment of ample liquidity conditions has incentivised many banks to adapt their business models. In parallel, the demand for reserves has also increased for more exogenous reasons such as post-global financial crisis liquidity regulation and increased liquidity concentration. Our estimates indicate an increase, over recent years, in the level of excess liquidity required in the euro area to avoid a rise in short-term market rates. Moreover, the dependency on the adopted monetary policy instruments and the external environment highlights the increased uncertainty in estimating future levels of required reserves JEL Classification: E41, E44, E50, E51, E58

Keywords: central bank reserves; ECB; Eurosystem; liquidity management; monetary policy implementation (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-isf, nep-mac and nep-mon
Note: 3357083
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbops:2021282

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