october 2008, overnight money market activity rapidly occupied the lower half of the corridor, and in fact, with few interruptions, the overnight rate has been close to the floor of it ever since. for all practical purposes, the relevant portion of the corridor for daily market activity has shrunk to the space existing between the rate on the main refinancing operations – on the upside – and the rate on the deposit facility – on the downside. bis central bankers ’ speeches should the corridor be brought back to its standard width – spanning the entire distance between the marginal lending rate and the deposit facility rate – not only de jure but also de facto? in other words : should we go back to the standard quantity - based technology of liquidity provision which was founded on the principle of balanced liquidity conditions? or should we maintain excess liquidity and operate the system through parallel adjustments to the deposit facility rate and the rate on the main refinancing operations? i am asking this question, because observers – marvin goodfriend1, for example – have been arguing for a system where the monetary authorities adjust a policy floor – the rate paid on reserves or the deposit facility rate – and the system is saturated with excess liquidity, so that overnight market rates are kept close to the floor. let me expound the merits and drawbacks of the discussed system, again upon the premise that i do not have a quantitative scale to weigh the ones against the others. • first advantage : the volatility of the overnight rate would likely be squeezed to minuscule numbers. true, our overnight rate has been more – rather than less – volatile since it moved to the floor of the corridor. but it is also true that excess liquidity conditions have been unsteady and uncertain in the past. here, i imagine a scenario in which the liquidity supply would be kept steady and reasonably predictable. a more stable overnight rate, it has been argued, could enhance the transmission of policy shifts – adjustments to the deposit facility rate – throughout the term structure of money market rates. • second advantage : the central bank would maintain one important acquisition from the crisis period : that is, its capacity to disentangle interest rate decisions from decisions concerning the scale of its own liquidity operations in order to remain resilient to large - scale liquidity shocks. this possibility may come in handy at the time of exit, in situations when inflation risks would call for a tightening of policy, while concerns about the

fragility of the banking system would suggest prolonging the horizon for easy access to central bank credit. but even in the steady state – after the exit – the new system would be marginally more resilient to large liquidity shocks and acute liquidity stress in the money market. banks would receive funding certainty, as their liquidity needs would be met. but there are drawbacks as well. first, for the ecb at least, this would require banks to be willing to hold reserves in excess of their needs. in a normal situation, absent any financial stress, this is difficult to ensure in a system ( like ours ) in which liquidity injections are the consequence of counterparties ’ – not the central bank ’ s – decisions. second, importantly, a system of permanent excess liquidity could potentially distort signals of liquidity and credit risk in the money market, as money market activity could be compressed – or suppressed altogether. i will come back to this point in a short while. let me turn to the second issue, the duration and maturity of central bank operations. in our case, before the crisis, the bulk of liquidity was provided through operations with a maturity of one week. we also provided ( pre - set ) amounts through longer - term operations, but to a lesser extent and with a maximum maturity of three months. as an alternative, one may conceive of frameworks in which the menu of maturities open for bank borrowing would be much richer. for example, there could be merits in matching the more structural long - term trends in the autonomous liquidity factors, most notably the growth in currency in circulation, with corresponding instruments of structural liquidity supply at longer maturities. expanding the range of maturities following the exit would probably go hand - in - hand with the decision to return to competitive auctions. but such a steady state framework would be nevertheless more robust to renewed bouts of perceived funding risk in the market. marvin goodfriend, “ interest on reserves and monetary policy ”, frbny economic policy review, may 2002. bis central bankers ’ speeches let me turn to the third – very much related – issue : the most appropriate mode of liquidity provision and the desirability of market versus central bank intermediation. before the crisis, the intermediation role of the ecb was limited to filling the structural “ liquidity deficit ” of all the banks vis - a - vis the monetary authority. the pre