Monetary policy has traditionally been viewed as the process by which a central bank uses its influence over the supply of money to promote its economic objectives. This article highlights the important similarities in the monetary policy implementation systems used by many central banks. In these systems, there is a tight link between money and monetary policy because the supply of reserve balances must be set precisely in order to implement the target interest rate. This link creates tensions with the central bank's other objectives. The study also presents an approach to implementing monetary policy in which this link is severed, leaving the quantity of reserves and the interest rate target to be set independently. In this floor-system approach, interest is paid on reserve balances at the target interest rate. While the floor system has received a fair amount of attention in policy circles recently, there are important open questions about how well such a system will work in practice.
Todd Keister, Antoine Martin, and James McAndrews Divorcing Money from Monetary Policy • Many central banks operate in a way that 1. Introduction creates a tight link between money and monetary policy, as the supply of reserves must be set precisely in order to implement the target interest rate. M onetary policy has traditionally been viewed as the process by which a central bank uses its influence over the supply of money to promote its economic objectives. For example, Milton Friedman (1959, p. 24) defined the tools of • Because reserves play other key roles in the monetary policy to
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