The conduct of monetary policy in a floor system and under an Ample Reserve Regime

Domenica Tropeano

Chapter 5 in Central Banking, Monetary Policy and Financial In/Stability, 2025, pp 82-100 from Edward Elgar Publishing

Abstract: Since the financial crisis of 2007–08 most central banks have implemented their monetary policies through a floor system. In this context, the increasing segmentation of short-term money markets and the persistence of high profit targets by large banks, which have become even larger after the crisis, jointly with the introduction of complex capital and liquidity rules, have given rise to problems in the transmission mechanism of monetary policy. These problems have increased since the withdrawal from asset purchase policies and the rise in rates. The aim of this chapter is to examine some examples of disturbed transmission of monetary policy in the US. In particular, repo lending rates have sometimes been markedly above the overnight reverse repo lending rate with the central bank, and sometimes below the latter. Both of these have disrupted the short-term money market by threatening the liquidity of very important financial assets such as government bonds. The chapter focuses on the speculative trades by hedge funds in the government bond market called basis trades. These are highly leveraged trades, and hedge funds’ withdrawals could cause illiquidity in government bond markets.

Keywords: Monetary policy; Treasuries; Illiquidity; Basis trade; Hedge funds (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035302147
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