Title page
Contents
1. Introduction 2
2. The pre-2008 operational framework 4
3. Post-2008 developments 6
3.1. Liquidity conditions 6
3.2. Interest rate stability 7
3.3. Orderly spreads and monetary policy transmission 8
3.4. Zero lower bound 10
3.5. Conclusion 12
4. Situation in mid-2024 13
5. Choice criteria 16
5.1. The separation principle applies again 17
5.2. Does the choice of an operational framework influence the monetary policy stance? 17
5.3. Potency of interest rate changes vs. balance sheet management 19
5.4. Criteria to choose an operational framework 19
6. Different options 22
6.1. Stay with floor system 22
6.2. Move to corridor system 23
6.3. Hybrid 23
6.4. Complementary options 23
6.5. A matrix approach 24
7. The ECB's operational framework review 26
7.1. The content of and gaps in the review 26
7.2. More precision would have been unwarranted 27
8. Features of a new operational framework 27
8.1. The desirable amount of excess liquidity to be left in the system 27
8.2. Longer term refinancing operations 31
8.3. Portfolio of securities 32
8.4. Non-bank financial institutions 33
8.5. Central bank digital currency 33
8.6. Conclusions 35
References 37
Appendix 1. The effect of liquidity concentration 40
Appendix 2. Comparing the elasticities of balance sheet changes and interest rates changes on inflation 42
Table 1. A Matrix approach to criteria and options for an operational framework 25
Figure 1. ECB policy rates and market rates before the GFC 6
Figure 2. Spread between EONIA and the MROr (basis points) 8
Figure 3. Yields on Italian, Spanish and German 10-year government bonds and the risk-free 10-year Overnight Index Swap rate 9
Figure 4. ECB key policy rates, overnight market rates (RHS, percentage points) and excess liquidity (LHS, € billions) 11
Figure 5. ECB balance sheet, liabilities (€ trillions) 14
Figure 6. TARGET2 balances of core vs periphery (€ billions) 15
Figure 7. Spread between deposit facility rate and overnight rate (basis points) 16
Figure 8. Excess liquidity and spread between the relevant overnight rate and the DFR 28
Figure 9. Extrapolation of the ECB balance sheet, liabilities (€ trillions) 29
Figure 10. Relationship between excess liquidity and the spread overnight rate/DFR corrected for liquidity concentration 31
Figure 11. Potential effects of the introduction of a CBDC on bank liquidity 34