Interest on reserves, interbank lending, and monetary policy

Stephen Williamson

Journal of Monetary Economics, 2019, vol. 101, issue C, 14-30

Abstract: A two-sector general equilibrium banking model is constructed to study the functioning of a floor system of central bank intervention. Only retail banks can hold reserves, and these banks are subject to a capital requirement, creating “balance sheet costs” of holding reserves. An increase in the interest rate on reserves has different qualitative effects from a reduction in the central bank’s balance sheet. Increases in the central bank’s balance sheet can have redistributive effects, and can reduce welfare. A reverse repo facility at the central bank puts a floor under the interbank interest rate, and is always welfare improving.

Keywords: Monetary policy; Floor system; Channel system; Interest on reserves (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (23)

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Related works:
Working Paper: Interest on Reserves, Interbank Lending, and Monetary Policy (2016)
Working Paper: Interest on Reserves, Interbank Lending, and Monetary Policy (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:101:y:2019:i:c:p:14-30

DOI: 10.1016/j.jmoneco.2018.07.005

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