Fighting Inflation without Massive Transfers to Banks

Paul De Grauwe and Yuemei Ji ()

Financial and Economic Review, 2024, vol. 23, issue 4, 80-101

Abstract: The major central banks now operate in a regime of abundant bank reserves. As a result, they can only raise the money market rate by increasing the rate of remuneration of bank reserves. This, in turn, leads to large transfers of central banks' profits to commercial banks that will become unsustainable and renders the transmission of monetary policies less effective. We propose a two-tier system of reserve requirements that would only remunerate the reserves in excess of the minimum required. This would drastically reduce the giveaways to banks, allow the central banks to maintain their current operating procedures and make monetary policies more effective in fighting inflation.

Keywords: central banks; inflation; bank reserves; remuneration (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 2024
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