Achieving Price Stability by Manipulating the Central Bank's Payment on Reserves

Robert Hall () and Ricardo Reis
Additional contact information
Robert Hall: Stanford University

No 1634, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: Today, all major central banks pay or collect interest on reserves, and stand ready to use the interest rate as an instrument of monetary policy. We show that by paying an appropriate rate on reserves, the central bank can pin the price level uniquely to a target. The essential idea is to index reserves to the market interest rate, the price level, and the target price level in a way that creates a contractionary financial force if the price level is above the target and an expansionary force if below. Our payment-on-reserves policy process does not require terminal conditions like Taylor rules, exogenous fiscal surpluses like the fiscal theory of the price level, liquidity preference as in quantity theories, or local approximations as in new Keynesian models. The process accommodates liquidity services from reserves, segmented financial markets where only some institutions can hold reserves, and nominal rigidities. We believe it would be easy to implement.

Pages: 38 pages
Date: 2016-10
New Economics Papers: this item is included in nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://www.centreformacroeconomics.ac.uk/Discussio ... MDP2016-34-Paper.pdf (application/pdf)

Related works:
Working Paper: Achieving Price Stability by Manipulating the Central Bank's Payment on Reserves (2016)
Working Paper: Achieving price stability by manipulating the central bank's payment on reserves (2016)
Working Paper: Achieving Price Stability by Manipulating the Central Bank's Payment on Reserves (2016)
Working Paper: Achieving Price Stability by Manipulating the Central Bank’s Payment on Reserves (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:1634

Access Statistics for this paper

More papers in Discussion Papers from Centre for Macroeconomics (CFM) Contact information at EDIRC.
Bibliographic data for series maintained by Helen Power ().