Abstract

The “liquidity management” of a central bank is defined as the framework, set of instruments and rules the central bank uses in steering the amount of bank reserves in order to control their price (i.e. short term interest rates) in consistency with its ultimate goals (e.g. price stability). This paper discusses the basic tools of a tentative theory of liquidity management. The time-structure of £fulfilling reserve requirements is identified as the crucial dimension of the “framework” for liquidity management. The paper then gives an overview of key elements explaining how the optimisation behaviour of banks shapes overnight rates in a system with reserve requirements and averaging. The paper continues by specifying the concept of “liquidity management strategy” and by providing examples of such strategies. Finally, based on the preceding elements, it outlines the approach that a normative theory of liquidity management could follow and provides a basic example as illustration. (JEL E52)