Floor System Fed

Before 2008 the interest rate policy system is a so called corridor system where the discount rate served as the corridor ceiling and the zero lower bound zlb was the floor.

Floor system fed.

Fed s pre 2008 corridor system. If it increases the rate it pays on reserves the federal funds rate will. Instead it must adjust the interest rate it pays on reserves. In this system the demand curve of the bank reserve market is downward sloping with respect to the interbank interest rate.

A more detailed discussion of these efficiency concerns and other differences between corridor type and floor type systems can be found in two federal reserve publications divorcing money from monetary policy and understanding monetary policy implementation leaky ceilings and soggy floors. Today s post is the second in a two part series on how the federal reserve influences interest rates. Today s post will explain how reality has differed from theory for conducting policy and what the fed s solution has been. Yesterday s post explained that the federal reserve has moved from a channel system to a floor system regarding the conduct of monetary policy.

The floor system has worked well so far in re normalizing the fed s policies after the extended period of exceptionally low interest rates made necessary by the financial crisis. Over the long term however the fed should find another approach to policy implementation.