Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197950 
Year of Publication: 
2017
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2017-25
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Monetary policy implementation could, in theory, be constrained by deeply negative rates since overnight market participants may have an incentive to invest in cash rather than lend to other participants. To understand the functioning of overnight markets in such an environment, we add the option to exchange central bank reserves for cash to the standard workhorse model of monetary policy implementation (Poole 1968). Importantly, we show that monetary policy is not constrained when just the deposit rate is below the yield on cash. However, it could be constrained when the target overnight rate is below the yield on cash. At this point, the overnight rate equals the yield on cash instead of the target rate. Modifications to the implementation framework, such as a tiered remuneration of central bank deposits contingent on cash withdrawals, can work to restore the implementation of monetary policy such that the overnight rate equals the target rate.
Subjects: 
Interest rates
Monetary policy implementation
Monetary policy framework
JEL: 
E4
E40
E42
E43
G0
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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