Central Bank Reserves and the Balance Sheet of Banks

Hans Gersbach, Jean-Charles Rochet () and Ernst-Ludwig von Thadden ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We introduce a tractable model of the two-tier monetary system with heterogeneous agents and incomplete markets. We use this model to characterize the dynamics of bank lending under general fiscal and monetary policy and derive the welfare optimal level of Central Bank reserves and the optimal interest rate on reserves. We also identify a new risk channel of monetary policy. In the model, banks have a dual role as loan providers and money creators, and cannot fully diversify credit risk. Central Bank reserves are used to settle interbank claims and serve as a safe asset, thereby buffering risks for banks. We show how the Central Bank and the Treasury can implement any desired allocation by setting interest rates, issuing a particular amount of reserves, and imposing taxes, and show that uncoordinated policy responses to shocks by the Central Bank alone may cause sub-optimal outcomes and significant instability.

Keywords: Central Bank reserves; interest rate on reserves; liquidity requirements; mone tary system; incomplete markets (search for similar items in EconPapers)
JEL-codes: E42 E43 E50 (search for similar items in EconPapers)
Pages: 42
Date: 2026-06
New Economics Papers: this item is included in nep-cba, nep-fdg and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.crctr224.de/research/discussion-papers/archive/dp765 (application/pdf)

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:bon:boncrc:crctr224_2025_765

Access Statistics for this paper

More papers in CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany Kaiserstr. 1, 53113 Bonn , Germany.
Bibliographic data for series maintained by CRC Office ().