The Literature on Monetary Policy Implementation

This chapter discusses the literature on monetary policy implementation. First, it focuses on the recent debate about the outcome of the ongoing normalization process, with particular attention to the euro area and the US. Despite the different views about the pros and cons of the two options on the table, either keep the floor system in place or go back to the corridor system, the first option seems to be prevailing among scholars and central bankers, for several reasons: the problems related to the unwinding of the huge excess liquidity accumulated during the years of quantitative easing policies, the difficulties in providing reliable estimates of the demand for bank reserves, and the financial stability concerns raised by a regime relying on liquidity shortage. We will then review the older literature on the traditional interest rate steering framework, which has introduced some cornerstone ideas, such as: decoupling principle, averaging provision of the reserve requirement as a stabilizing mechanism, and open mouth operations.