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Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy

Eric Monnet () and Miklos Vari ()

No 2019/176, IMF Working Papers from International Monetary Fund

Abstract: This paper explores what history can tell us about the interactions between macroprudential and monetary policy. Based on numerous historical documents, we show that liquidity ratios similar to the Liquidity Coverage Ratio (LCR) were commonly used as monetary policy tools by central banks between the 1930s and 1980s. We build a model that rationalizes the mechanisms described by contemporary central bankers, in which an increase in the liquidity ratio has contractionary effects, because it reduces the quantity of assets banks can pledge as collateral. This effect, akin to quantity rationing, is more pronounced when excess reserves are scarce.

Keywords: WP; discount window; money market; bank liquidity; discount rate; Specialness; repo market; asset purchases; securities reserves requirements; monetary policy tool; securities requirements; Fed official; Fed system; central bank control; securities-reserve requirement; monetary management; Reserve requirements; Liquidity requirements; Liquidity management; Government securities; Securities; Europe; Global (search for similar items in EconPapers)
Pages: 48
Date: 2019-08-16
New Economics Papers: this item is included in nep-ban, nep-his, nep-mac and nep-mon
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Handle: RePEc:imf:imfwpa:2019/176