Policymakers can create an environment in which lenders innovate and compete vigorously, broadening the range of products to which even risky borrowers have access, at prices that most of them can afford.
In weighing the advantages of the Fed’s floor system compared to those of a “corridor system,” Fed officials haven’t just put their thumbs on the floor‐system scale by exaggerating its merits. They’ve also exaggerated the drawbacks of a corridor system.
There isn’t all that much difference between what the Fed has chosen to do and what I had suggested it do, except that by providing for a more certain and stable FRP rate “penalty,” my proposal would have constituted a somewhat more reliable means by which to discourage the pool’s overuse.
Former New York Fed President Bill Dudley once again claims that the post‐2008 floor system “is much simpler to carry out” than a corridor arrangement. Only he now adds that this is so, “provided there are sufficient reserves in the system.”