Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic

Aleksander Berentsen, Alessandro Marchesiani, Christopher J. Waller

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An increasing number of central banks implement monetary policy via a channel system or a floor system. We construct a general equilibrium model to study the properties of these systems. We find that a floor system is weakly optimal if and only if the target rate satisfies the Friedman rule. Unfortunately, the optimal floor system requires either transfers from the fiscal authority to the central bank or a reduction in seigniorage payments from the central bank to the government. This is the unpleasant fiscal arithmetic of a floor system. When the central bank faces financing constraints on its interest expense, we show that it is strictly optimal to operate a channel system.
Original languageEnglish
Pages (from-to)523-542
Number of pages20
JournalReview of Economic Dynamics
Issue number3
Early online date27 Sept 2013
Publication statusPublished - 1 Jul 2014


  • monetary policy
  • floor system
  • channel system
  • standing facilities


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