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The execution of monetary policy: a tale of two central banks

Leonardo Bartolini and Alessandro Prati

No 165, Staff Reports from Federal Reserve Bank of New York

Abstract: The Eurosystem and the U.S. Federal Reserve System follow quite different approaches to the execution of monetary policy. The former institution adopts a "hands-off" approach that largely delegates to depository institutions the task of stabilizing their own liquidity at high frequency. The latter institution follows a much more "hands-on" approach involving daily intervention to fine-tune the liquidity of the banking system. We review the implications of these contrasting approaches, focusing on their impact on the high-frequency behavior of very short-term interest rates. We also examine interest rate behavior following the Y2K date change and the 9/11/2001 crisis - events that required the two central banks to deviate significantly from their customary style of liquidity management. We find that, despite differences in operational framework, certain elements of the institutions' styles of day-to-day intervention have caused very short-term interest rates to behave similarly in the euro area and the United States. Significantly, during periods of anticipated or actual crisis, the two institutions have acted very much alike in managing the liquidity of the interbank market in response to shocks.

Keywords: monetary policy; European Monetary System; Federal Reserve System; interest rates (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-mon
Date: 2003
Note: For a published version of this report, see Leonardo Bartolini and Alessandro Prati, "The Execution of Monetary Policy: A Tale of Two Central Banks," Economic Policy 18, no. 37 (October 2003): 435-67.
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