The Bank for International Settlements published research proposing a new way to classify central banks’ monetary policy operational frameworks, arguing that the traditional “corridor” and “floor” 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. The marginal opportunity cost is defined as the spread between the overnight money market rate relevant to the operational target and the rate earned on reserves at the central bank, while the quantity dimension focuses on reserves held in excess of any requirement and is adjusted in the empirical application to include some near-substitute overnight central bank liabilities. Applying the taxonomy to 12 jurisdictions using 2024 data normalised by bank credit to the private non-financial sector 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 the reserve quantity ranging from zero in Korea to close to 65% in Japan. The exercise also finds unexpected similarities across ostensibly different frameworks, including a cluster around moderately large reserves and low but positive marginal costs (Reserve Bank of Australia, Bank of Canada and Sveriges Riksbank), and highlights cases where marginal and average opportunity costs diverge (Mexico, Switzerland and Thailand) through different tools such as tiered remuneration or daily reserve-absorbing operations. Boxes discuss how Basel III liquidity standards do not explicitly require reserve holdings but can create scope for supervisory influence on reserve demand, and how balance sheet mechanics and sterilisation choices affect reserve quantities.
Bank for International Settlements 2025-09-15
Bank for International Settlements proposes a new taxonomy for monetary policy operational frameworks based on reserve opportunity cost and reserve quantity
The Bank for International Settlements has introduced a new taxonomy for classifying central banks' monetary policy frameworks, moving beyond traditional "corridor" and "floor" labels. This classification uses two dimensions: the marginal opportunity cost of holding reserves and the quantity of reserves. Research applied to 12 jurisdictions reveals significant variations in these dimensions and unexpected similarities across different frameworks.