Should the Federal Reserve Pay Competitive Interest on Reserves?

Matthew Canzoneri, Robert Cumby () and Behzad Diba

Journal of Money, Credit and Banking, 2017, vol. 49, issue 4, 663-693

Abstract: In 2008, the Federal Reserve began paying interest on reserves. How should the Fed use this new policy instrument? As the Fed reduces its balance sheet, should it continue to satiate reserve demand and pay competitive interest on reserves? Here, we argue that this may be an inefficient use of the new policy instrument. Using a standard Dynamic Stochastic General Equilibrium model (DSGE), augmented to include a banking sector and an interbank market, our benchmark calibration implies an optimal tax on reserves of about 20 to 40 basis points in the steady state, and a fluctuating tax rate in response to shocks.

Date: 2017
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https://doi.org/10.1111/jmcb.12394

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:49:y:2017:i:4:p:663-693

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