Staff Reports

Monetary Policy Implementation Frameworks:A Comparative Analysis

January 2008Number 313
Revised October 2008
JEL classification: E52, E58, E59

Authors: Antoine Martin and Cyril Monnet

We compare two stylized frameworks for the implementation of monetary policy. The first framework relies only on standing facilities, and the second one relies only on open market operations. We show that the Friedman rule cannot be implemented in the first framework, but can be implemented using the second framework. However, for a given rate of inflation, we show that the first framework unambiguously achieves higher welfare than the second one. We conclude that an optimal system of monetary policy implementation should contain elements of both frameworks. Our results also suggest that any such system should pay interest on both required and excess reserves.

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For a published version of this report, see Antoine Martin and Cyril Monnet, "Monetary Policy Implementation Frameworks: A Comparative Analysis," in Ed Nosal, Christopher Waller, and Randall Wright, eds., "Money, Credit, and Liquidity: Part 1," special issue, Macroeconomic Dynamics 15, suppl. 1 (2011): 145-89.