Monetary policy in a channel system

Channel systems for conducting monetary policy are becoming increasingly popular. Despite its popularity, the consequences of implementing policy with a channel system are not well understood. We develop a general equilibrium framework of a channel system and study the optimal policy. A novel aspect of the channel system is that a central bank can ‘‘tighten’’ or ‘‘loosen’’ its policy without changing its policy rate. This policy instrument has so far been overlooked by a large body of the literature on the optimal design of interest-rate rules