The allocation channel of monetary policy: reserve parking, liquidity regimes and transmission effectiveness in the euro area

Purpose This study aims to examine whether the allocation of central-bank reserves between the European Central Bank (ECB) deposit facility and current accounts influences monetary-policy transmission independently of the aggregate quantity of liquidity. The study addresses an empirical puzzle: abundant-reserve frameworks are expected to provide tight control of overnight rates, yet small but persistent deviations between market and administered rates remain. The dependent variable is the transmission gap, measured as the absolute deviation between the euro short-term rate (€STR) and the ECB deposit facility rate. Reserve allocation is measured by both the share of reserve liquidity parked in the deposit facility and the levels of parked and circulating balances. Design/methodology/approach The study uses monthly euro-area data. The main estimations use a modern transmission sample beginning with the introduction of €STR, while a complementary historical liquidity sample supports longer-run analyses of liquidity regimes, thresholds and structural stability. The empirical framework combines heteroskedasticity- and autocorrelation-consistent baseline regressions with interaction, dynamic, threshold, quantile, structural-break and rolling-window specifications, together with multi-collinearity diagnostics and alternative dependent-variable checks. Findings Reserve allocation does not have a uniform average association with monetary-policy transmission. The unconditional association between the parking ratio and the transmission gap is statistically indistinguishable from zero. However, the association becomes economically and statistically stronger during periods of elevated financial stress, under the reformed ECB operating framework and when reserve absorption is extreme; it is also concentrated in the upper tail of the transmission-gap distribution. The absolute level of parked liquidity carries more information about transmission effectiveness than the parking ratio alone. Structural-break and rolling-window evidence further indicates that the relationship between reserve allocation and policy transmission changes with the ECB’s operating environment. Originality/value The study identifies a state-dependent allocation channel of monetary policy through which the distribution of reserves, rather than reserve quantity alone, is associated with policy-rate transmission in an abundant-reserve framework. By linking reserve-allocation behaviour to money-market pass-through, it connects the literatures on monetary-policy implementation, floor-system operating frameworks, reserve management and central-bank liquidity design. The findings inform reserve-remuneration policy, liquidity-management practice and the design of abundant-reserve operating frameworks in the euro area and other advanced economies. They also indicate that reserve-allocation measures are best used as complementary, state-contingent monitoring indicators rather than as policy targets.