Central bank reserve management: Aggregate targets and interest payments on reserves

Michael Tindall and Roger Spencer

International Advances in Economic Research, 2000, vol. 6, issue 2, 178-191

Abstract: Tindall and Spencer [1997] presented a dynamic stochastic theory of borrowed reserves that explained the observed nonlinear relationship between borrowing and the spread between the federal funds rate and the discount rate. It showed that borrowed reserves are a function of deposit variation. This paper extends that research, providing a general dynamic model of all key bank reserve aggregates. Nearly all reserve aggregates, which can be used as operating targets by the Federal Reserve, are subject to the influence of deposit variation and are nonlinearly related to the spread between the federal funds rate and the discount rate, complicating their use as targets. Additionally, it is found that the Federal Reserve's proposal to pay interest on bank reserves could generate substantial distortions in reserve aggregate behavior where interest is paid on excess reserves as well as required reserves, effectively resulting in potentially large discount-window policing problems. Copyright International Atlantic Economic Society 2000

Date: 2000
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DOI: 10.1007/BF02296100

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