Dear Friends and Colleagues,
Today, the Bank of Finland is publishing three articles in both Finnish and English on a core central bank task: monetary policy implementation. The topic is timely as, following the March 2024 decision of the European Central Bank’s Governing Council, the Eurosystem is moving towards a demand-driven framework for steering short-term money market rates.
The three articles approach the issue from different angles, but they all address the same fundamental question: How will the Eurosystem’s implementation of monetary policy perform in an environment where the financial system is changing and the level of central bank reserves is declining?
To complement these articles, I would like to focus today on a more immediate question: What will the transition to this new way of implementing monetary policy actually look like?
Let me stress at the outset that this is not a discussion about the monetary policy stance. My focus is on the plumbing: how the desired monetary policy stance is implemented in short-term money markets.