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

August 16, 2019

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Format: Chicago

Eric Monnet, and Miklos Vari. Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy, (USA: International Monetary Fund, 2019) accessed September 19, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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 Based on numerous historical documents, we show that liquidity ratios similar to the Liquidity Coverage Ratio (LCR) were commonly used as monetary policy tools by central banks between the 1930s and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.

Subject: Asset and liability management, Banking, Financial institutions, Financial regulation and supervision, Government securities, Liquidity indicators, Liquidity management, Liquidity requirements, Monetary policy, Reserve requirements, Securities

Keywords: Asset purchases, Bank liquidity, Central bank control, Discount rate, Discount window, Europe, Fed official, Fed system, Global, Government securities, Liquidity management, Liquidity requirements, Monetary management, Monetary policy tool, Money market, Repo market, Reserve requirements, Securities, Securities requirements, Securities reserves requirements, Securities-reserve requirement, Specialness, WP

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/176
Stock No:

WPIEA2019176
ISBN:

9781498320474
ISSN:

1018-5941

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