Abstract
The paper demonstrates the efficacy of liquidity management through both the rate and quantum channels. Using the concepts of autonomous and discretionary liquidity, the paper derives the optimal policy mix of instruments which can be used for stabilizing the price of liquidity. For effective liquidity management, the sufficient condition highlighted in the paper has important implications for developing market-related monetary policy instruments, particularly in emerging market economies.
Highlights
Liquidity management by central banks typically refers to the framework, set of instruments, and the rules that the monetary authority follows in managing systemic liquidity, consistent with the ultimate goals of monetary policy
A major part of the existing literature on liquidity management focuses on assessing monetary policy stance rather than the strategy of monetary operations, mainly concentrating on advanced economies
We develop a model of the market for bank reserves in which the central bank uses the array of instruments at its disposal for stabilizing the price of liquidity [10, 11]
Summary
Liquidity management by central banks typically refers to the framework, set of instruments, and the rules that the monetary authority follows in managing systemic liquidity, consistent with the ultimate goals of monetary policy. In this regard, central banks modulate liquidity conditions by varying both the level of short-term interest rates and influencing the supply of bank reserves in the interbank market. Central banks enhanced the scope of liquidity management beyond traditional counterparties and broadened the basket of acceptable securities as collateral Against this backdrop, the paper develops a simple model of liquidity management using the framework of partitioning liquidity into autonomous and discretionary factors.
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