Divorcing money from monetary policy

By paying interest on reserve balances at the central bank's target interest rate, a central bank can increase the supply of reserves without driving market interest rates below its target, says a new paper from the New York Federal Reserve.

Many central banks operate in a way that creates a tight link between money and monetary policy, as the supply of reserves must be set precisely in order to implement the target rate. This link can generate tensions with central banks' other objectives

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