Monetary policy operational frameworks - a new taxonomy

Paolo Cavallino, Mathias Drehmann, Richard Finlay and Julie Remache

BIS Quarterly Review, 2025

Abstract: Central banks' operational frameworks are at the heart of monetary policy implementation. Yet the conventional classification falls short of capturing their wider implications for banks' incentives and market outcomes. We propose a new taxonomy based on two key dimensions. First is the marginal opportunity cost of holding reserves, which influences banks' incentives to trade reserves in the money market. Second is the quantity of reserves, which affects how banks manage liquidity risks and comply with regulatory and supervisory requirements. The continuous nature of these dimensions allows for a granular classification of operational frameworks. Applying the taxonomy to real-world operational frameworks uncovers unexpected similarities between distinct frameworks and highlights how similar designs can lead to differing outcomes.

JEL-codes: E42 E58 (search for similar items in EconPapers)
Date: 2025
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