Does Paying Interest on Bank Reserves Improve Welfare?

Ross Milbourne

Working Paper from Economics Department, Queen's University

Abstract: Most partial equilibrium analyses argue that the Central Bank should pay interest to the commercial banks on the reserves those banks are required to hold. This paper argues that such a proposal might no be welfare improving because in general equilibrium there is a tax burden that this payment creates. A simple model is presented and the crucial condition upon whether, in general equilibrium, these interest payments are welfare-improving are derived. The conditions are slight counter intuitive and casual empiricism suggests that such payments probably are not welfare improving.

Pages: 20 pages
Date: 1988
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:718

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