Monetary Policy in a Channel System

Abstract

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.We 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 interestrate rules.

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