Flexibility of Monetary Policy in the Euro Area and the Remuneration of Required Reserves

Abstract:

The governing council of the ECB has committed itself to make interest rate decisions only during the first of its bi-monthly meetings to avoid speculation on interest rate changes every two weeks. Presenting a model of a bank's liquidity demand and reserve management, we show that this self-commitment would not be necessary, i.e. that monetary policy could be conducted more flexible, if the remuneration of required reserves were changed. Then, interest rate changes would not influence a bank's net marginal costs of holding reserves implying that speculation on interest rate changes would not occur.