Monetary policy implementation in a negative rate environment: FB3-5/2017-25E-PDF

"Monetary policy implementation could, in theory, be constrained by deeply negative rates since overnight market participants may have an incentive to invest in cash rather than lend to other participants. To understand the functioning of overnight markets in such an environment, we add the option to exchange central bank reserves for cash to be standard workhorse model of monetary policy implementation (Poole 1968). Importantly, we show that monetary policy is not constrained when just the deposit rate is below the yield on cash. However, it could be constrained when just the deposit rate is below the yield on cash. At this point, the overnight rate equals the yield on cash instead of the target rate. Modifications to the implementation framework, such as a tiered remuneration of central bank deposits contingent on cash withdrawals, can work to restore the implementation of monetary policy such that the overnight rate equals the target rate."--Abstract, p. ii.

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Department/Agency Bank of Canada.
Title Monetary policy implementation in a negative rate environment
Series Title Bank of Canada staff working paper,
Publication Type Series - View Master Record
Language [English]
Format Electronic
Electronic Document

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Note "July 2017."
Date 2017.
Number of Pages ii, 41 p. :
Catalogue Number
  • FB3-5/2017-25E-PDF
Subject Terms Monetary policy, Interest rates