Liquidity regulation and the implementation of monetary policy

Morten Bech, Todd Keister

Research output: Contribution to journalArticlepeer-review

10 Scopus citations


We study the impact of the Basel III liquidity coverage ratio (LCR) on interbank interest rates in an otherwise-standard model of monetary policy implementation. When banks face the possibility of an LCR shortfall, the overnight interest rate tends to decrease, while a regulatory premium arises in longer-term rates. In addition, the LCR requirement can substantially alter the effect of a central banks’ open market operations on equilibrium interest rates.

Original languageEnglish (US)
Pages (from-to)64-77
Number of pages14
JournalJournal of Monetary Economics
StatePublished - Dec 2017

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


  • Basel III
  • Central bank reserves
  • Corridor system
  • Floor system
  • Liquidity coverage ratio (LCR)
  • Monetary policy implementation

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