Alternative Monetary Policy Frameworks for Price and Financial Stability

With revolutionary changes of the financial environment, due in particular to the progress of information and communication technology and the aftermath of the global financial crisis, central banks are facing new challenges in the pursuit of price, financial and exchange rate stability. This research paper looks at how central banks can enhance the effectiveness of monetary policy when in practice, the policy tools available to them are rather limited. In fact, many of them have no better option but short-term interest rates. This paper compares three alternative monetary policy operation frameworks viz. the Channel System, Interest-on-Reserves and Asset-based Reserve Requirements. All the three frameworks have one thing in common - they all allow central banks to preserve their leverage over short-term interest rates and effectively pursue financial stability by controlling the total volume of credit in the economy. However, their practical implementation varies to a large degree.