The Bank for International Settlements has published a BIS Quarterly Review article proposing a new taxonomy for classifying central banks’ monetary policy operational frameworks, arguing that the traditional corridor versus floor style labels are too coarse to capture how framework design shapes banks’ incentives and money market outcomes. The taxonomy classifies frameworks along two continuous dimensions, the marginal opportunity cost of holding reserves and the quantity of reserves, to enable more granular cross-country comparisons. The marginal opportunity cost is defined as the spread between the overnight money market rate (typically the operational target) and the rate earned at the central bank deposit facility, while the quantity dimension focuses on reserves held overnight in excess of central bank requirements and also includes certain overnight central bank liabilities that resemble reserves for liquidity risk management purposes. Applying the taxonomy to 12 jurisdictions in 2024 shows wide dispersion, with marginal opportunity costs ranging from above 11 percentage points in Mexico to small negative values in the euro area, the United Kingdom and the United States, and reserve quantities ranging from zero in Korea to close to 65% of bank credit to the private non-financial sector in Japan. The application also highlights unexpected similarities in outcomes across seemingly different designs, including the Reserve Bank of Australia, the Bank of Canada and Sveriges Riksbank, and shows cases where marginal and average opportunity costs diverge, notably Mexico, Switzerland and Thailand, driven by differences such as quota-based remuneration or the use of daily reserve-absorbing operations.
Bank for International Settlements 2025-09-15
Bank for International Settlements proposes a new two-dimensional taxonomy for monetary policy operational frameworks
The Bank for International Settlements has proposed a new two-dimensional taxonomy for classifying central banks’ monetary policy operational frameworks, arguing that traditional corridor versus floor labels are too coarse. The framework is based on the marginal opportunity cost of holding reserves—defined as the spread between the overnight money market rate and the central bank deposit facility rate—and the quantity of reserves, including certain overnight central bank liabilities, with application to 12 jurisdictions in 2024 revealing wide dispersion in both dimensions and unexpected similarities across different designs.