The cost of excess reserves and inflation in the United States during the last century

David Pavon-Prado

MPRA Paper from University Library of Munich, Germany

Abstract: This paper proposes another factor explaining why the American banking sector accumulates reserves (the reserves-cost mechanism) and its consequences mainly on inflation (reserves-cost channel). The mechanism claims that when banks are holding reserves more expensive than those available in the market, they obtain new reserves and accumulate those unused. In addition, the cost of the sources from where banks obtain their reserves determines banks’ decisions about the loans rate. This originates the reserves-cost channel, whereby banks’ decisions about the loans rate modify the impact of Fed’s policies on final targets such as inflation. I test the validity of the mechanism and channel estimating an SVAR for the period 1922-2020. The results confirm both hypothesis and show that when banks set a loans rate lower in relation to the short-term rate of reference, there is higher demand for credit, output and inflation levels.

Keywords: monetary policy; Federal Reserve; SVARs; excess reserves; reserves cost (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2022-04-28
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-his, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:112797

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