Floor Systems for Implementing Monetary Policy: Some Unpleasant Fiscal Arithmetic

Aleksander Berentsen, Alessandro Marchesiani () and Christopher Waller

Review of Economic Dynamics, 2014, vol. 17, issue 3, 523-542

Abstract: An increasing number of central banks implement monetary policy via a channel system or a floor system. We construct a general equilibrium model to study the properties of these systems. We find that a floor system is weakly optimal if and only if the target rate satisfies the Friedman rule. Unfortunately, the optimal floor system requires either transfers from the fiscal authority to the central bank or a reduction in seigniorage payments from the central bank to the government. This is the unpleasant fiscal arithmetic of a floor system. When the central bank faces financing constraints on its interest expense, we show that it is strictly optimal to operate a channel system. (Copyright: Elsevier)

Keywords: Monetary policy; Floor system; Channel system; Standing facilities (search for similar items in EconPapers)
JEL-codes: E52 E58 E59 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (18)

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DOI: 10.1016/j.red.2013.09.001

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