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Channel systems for conducting monetary policy are becoming increasingly popular. Despite its popularity, the consequences of implementing policy with a channel system are not well understood. The authors develop a general equilibrium framework of a channel system and study the optimal policy. A novel aspect of the channel system is that a central bank can "Tighten" or "Loosen" its policy without changing its policy rate. This policy instrument has so far been overlooked by a large body of the literature on the optimal design of interest-rate rules.
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