Optimal monetary policy with interest on reserves and capital over-accumulation

Tai-Wei Hu

Journal of Economic Theory, 2021, vol. 196, issue C

Abstract: We propose a model where banks with limited liability issue deposits backed by capital, and households demand deposits and currency as means-of-payments for decentralized trades. When financial friction is severe or productivity is low, banks hold excess reserves in equilibrium with a low nominal interest rate, and with capital holdings above the efficient level. In that region, paying a positive interest on reserves financed by money creation is optimal. Under a fixed inflation target, optimal interest rate on reserves is procyclical. The constrained efficient allocation is implemented with a fixed and a proportional liquidity requirement in addition to interest on reserves when productivity is not too high.

Keywords: Monetary policy; Interest on reserves; Banking regulations (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053121001368
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:196:y:2021:i:c:s0022053121001368

DOI: 10.1016/j.jet.2021.105319

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().