Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy
49 Pages Posted: 28 Aug 2019
Date Written: August 2019
This paper explores what history can tell us about the interactions between macroprudential and monetary policy. Based on numerous historical documents, we show that liquidity ratios similar to the Liquidity Coverage Ratio (LCR) were commonly used as monetary policy tools by central banks between the 1930s and 1980s. We build a model that rationalizes the mechanisms described by contemporary central bankers, in which an increase in the liquidity ratio has contractionary effects, because it reduces the quantity of assets banks can pledge as collateral. This effect, akin to quantity rationing, is more pronounced when excess reserves are scarce.
Keywords: Central banks, Central banking and monetary issues, Bank credit, Bank rates, Financial management, Specialness, repo market, asset purchases, money market, reserve requirement, interbank, policy tool, government security, liquid asset
JEL Classification: E52, E58, G10, G21, E01, E5, K2
Suggested Citation: Suggested Citation