The Impact of the Basel III Liquidity Standards on the Implementation of Monetary Policy
40 Pages Posted: 29 Jul 2011 Last revised: 11 Sep 2012
Date Written: May 6, 2011
This paper analyses the impact of the new Basel III liquidity standards, in particular the liquidity coverage ratio (LCR), on the implementation of monetary policy in the Euro area. I develop a conceptual framework to investigate the interaction between the money market and monetary policy implementation. Based thereon, I argue that the future challenges to monetary policy implementation require a complete overhaul of the implementation framework ror two reasons: first, negative network dynamics and feedback loops exacerbate the impact of the standards; second, the on-going crisis itself challenges monetary policy implementation in the Euro area by its impact on the arbitrage relationship between open market operations and the unsecured money market rate. Finally, I discuss potential policy reactions.
Keywords: Basel III, liquidity regulation, money markets, monetary policy
JEL Classification: E40, E50
Suggested Citation: Suggested Citation