Following low nominal interest rate constraints, central banks utilize alternative non-standard monetary policy instruments to influence market liquidity and long-term asset prices. The core mechanisms include Quantitative Easing (QE), which expands the balance sheet by purchasing assets with maturities longer than Treasury bills; Interest on Reserves (IOR), a regulatory tool that sets a floor for short-term interest rates by compensating banks for holding excess reserves at the central bank; and Repurchase Agreement facilities, which allow the central bank to conduct open market operations via overnight swaps of securities against dollar reserves. These instruments collectively represent an expansion of monetary policy theory from traditional supply-and-demand dynamics in money markets to managing financial intermediaries' reserve holdings within a liquidity trap environment.
Following low nominal interest rate constraints, central banks utilize alternative non-standard monetary policy instruments to influence market liquidity and long-term asset prices. The core mechanis…