Why (or Why Not) Keep Paying Interest on Excess Reserves?

Gara Afonso

No 20121203, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: In the fall of 2008, the Fed added new policy tools to its portfolio of techniques for implementing monetary policy. In particular, since October 9, 2008, depository institutions in the United States have been paid interest on the balances they hold overnight at Federal Reserve Banks (see Federal Reserve Board announcement). Several other central banks, such as the European Central Bank (ECB) and the central banks of Canada, England, and Australia, have somewhat similar deposit facilities allowing banks to earn overnight rates on their balances. In this post, I discuss the benefits and costs of this new tool in an environment where excess reserves in the United States have now exceeded $1.4 trillion and account for close to 95 percent of all reserves.

JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2012-12-03
New Economics Papers: this item is included in nep-mac and nep-mon
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