Interest on Reserves and the Flexibility of Monetary Policy in the Euro Area

Ulrike Neyer

Scandinavian Journal of Economics, 2009, vol. 111, issue 2, pages 417-438

Abstract: This paper shows that remunerating required reserves can increase the flexibility of monetary policy. The remuneration at the current policy rate implies constant net marginal interest costs of holding required reserves. This allows the central bank to change the policy rate also within a reserve maintenance period without inducing a problematic reserve shifting on behalf of the banks. In the euro area, required reserves are remunerated at an average rate. Therefore, the way in which reserves are remunerated has to be changed in order to make use of the advantage of a higher flexibility of monetary policy. Copyright © The editors of the "Scandinavian Journal of Economics" 2009. .

Date: 2009

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Scandinavian Journal of Economics is edited by Jonas Agell, Nils Gottfries and Espen R. Moen

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