Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297095 
Year of Publication: 
2023
Series/Report no.: 
Bank of Canada Staff Discussion Paper No. 2023-26
Publisher: 
Bank of Canada, Ottawa
Abstract: 
In April 2022, the Bank of Canada announced that it would continue to use a floor system to implement monetary policy by providing a sufficiently large quantity of settlement balances to enable the overnight repo rate to trade at close to the deposit rate. In contrast, the Bank's guiding principles of prudence, transparency and neutrality, which govern the management of its balance sheet, favour maintaining settlement balances as low as possible. In this context, this paper describes two complementary approaches to estimating the appropriate quantity of settlement balances needed to effectively maintain a floor system. The first is a regressionbased analysis to estimate the quantity required to maintain the overnight repo rate close to the Bank's policy interest rate (which is equal to the deposit rate in a floor system). The second is an analysis of operational considerations in implementing a floor system in Canada. Both approaches highlight that considerable uncertainty exists in determining the demand for settlement balances. Such uncertainty emphasizes the need for the Bank to monitor money market conditions as it continues to normalize its balance sheet after undertaking quantitative easing operations related to the COVID-19 pandemic.
Subjects: 
Financial institutions
Financial markets
Financial system regulation and policies
Monetary policy implementation
Payment clearing and settlement systems
JEL: 
E41
E42
E52
E58
G21
G28
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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