Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic |
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| Institution: | 1. University of Basel, Switzerland;2. Federal Reserve Bank of St. Louis, United States;3. University of Minho, Portugal;4. University of Notre Dame, United States;1. Bank for International Settlements, Switzerland;2. Department of Biology, University of Washington, United States;3. External Faculty, Santa Fe Institute, United States;4. Federal Reserve Bank of New York, United States;5. Integrated Science Lab, Department of Physics, Umeå University, Sweden;1. University of Pennsylvania, United States;2. NBER, United States;3. University of Toronto, Canada;4. CUFE, China;5. Queen?s University, Canada;1. Simon Fraser University, Department of Economics, 8888 University Drive, Burnaby, B.C. V5A 1S6, Canada;2. University of California at Davis, Department of Economics, One Shields Avenue, Davis, CA 95616, USA;1. Department of Economics, University of Missouri, USA;2. Department of Economics, UW – Madison, USA;3. Department of Finance, UW – Madison, USA;4. FRB Chicago, USA;5. FRB Minneapolis, USA;6. NBER, USA;1. Department of Economic Theory, University of Basel, Switzerland;2. Federal Reserve Bank of St. Louis, United States;3. Management School, University of Liverpool, United Kingdom;1. Federal Reserve Bank of St. Louis, United States;2. Simon Fraser University, Canada;3. Washington University in St. Louis, United States |
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| 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. |
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| Keywords: | Monetary policy Floor system Channel system Standing facilities |
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