20240314-IMF-The_ECB_s_Future_Monetary_Policy_Operational_Framework_Corridor_or_Floor_40页_1mb

The ECB’s Future Monetary Policy Operational Framework: Corridor or Floor?

Key Points:

1. Current Situation:
   Before the GFC, the ECB used a corridor system, which was followed by an intermediate system and then a floor system since 2015. The floor system involves abundant reserves and bounding the overnight rate using a deposit facility.

2. Framework Comparison:

   • Corridor System: Narrower central bank balance sheets, promotes interbank market activity and tighter bank liquidity management. Requires frequent market operations to maintain the policy rate.
   • Floor System: Bounded from below by deposit facility, reduces liquidity shortages risk and offers precise control but may suppress interbank activity and increase central bank balance size.

3. Parsimonious Floor:
   The optimal framework is a hybrid of a "parsimonious floor" with minimal reserves and a "zero or near-zero corridor" (lending facility priced near the deposit rate). This reduces excess reserves, encourages better bank liquidity management, and stabilizes liquidity conditions.

4. Transition Considerations:
   The ECB will likely maintain the floor system during ongoing quantitative tightening (QT). Upon further balance sheet reduction, it may transition to a hybrid system. The choice depends on balancing reserve demand uncertainty, financial stability risks, and policy transmission effectiveness.

5. Key Takeaways:

   • A hybrid framework balances precision in rate control and financial stability.
   • Interbank market heterogeneity and liquidity stresses highlight the need to complete banking union reforms.
   • Ongoing monitoring is essential to adjust the operational framework as the ECB manages balance sheet reduction and maintains policy effectiveness.

Recommendations:

• Maintain collaborative liquidity assessment mechanisms between banks and the ECB during QT.
• Prioritize completing banking union reforms to mitigate financial fragmentation risks.
• Monitor bank liquidity demands to predict potential shifts from floor to corridor systems.