Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy
IMF Working Papers, August 16, 2019
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- Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy
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Bibliographic details
- Authors: Eric Monnet, Miklos Vari
- Published: August 16, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498320474.001
Overview and Research Question
- Authors: Eric Monnet, Miklos Vari
- Publication: IMF Working Papers, Working Paper No. 2019/176, Issue 176, Volume 2019
- Date: August 16, 2019
- Pages: 48
- DOI: https://doi.org/10.5089/9781498320474.001
- ISBN: 9781498320474
- ISSN: 1018-5941
- Subject keywords: Asset and liability management; Banking; Financial institutions; Financial regulation and supervision; Government securities; Liquidity indicators; Liquidity management; Liquidity requirements; Monetary policy; Reserve requirements; Securities
- Focus: Historical interactions between macroprudential and monetary policy via liquidity ratios
Key Historical Findings
- Liquidity ratios similar to the Liquidity Coverage Ratio (LCR) were commonly used as monetary policy tools by central banks between the 1930s and 1980s.
- Contemporary central bankers’ descriptions of mechanisms are supported by numerous historical documents examined in the paper.
Theoretical Mechanism and Model
- The authors build a model that rationalizes the historical mechanisms described by central bankers.
- Central model insight:
- An increase in the liquidity ratio has contractionary effects.
- Mechanism: higher liquidity ratios reduce the quantity of assets banks can pledge as collateral.
- This contractionary effect operates through quantity rationing of collateralized lending.
- The contractionary effect is more pronounced when excess reserves are scarce.
Policy-Relevant Implications
- Liquidity requirements can function as monetary policy instruments, not only as macroprudential tools.
- Interaction concerns:
- Adjusting liquidity ratios can tighten financial conditions by reducing collateral availability.
- The macroeconomic impact of liquidity-ratio changes depends critically on the abundance or scarcity of excess reserves.
Keywords and Thematic Links (as provided)
- 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
Source: IMF Working Paper No. 2019/176, "Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy", Eric Monnet and Miklos Vari, August 16, 2019.
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