Interest on excess reserves as a monetary policy instrument: the experience of foreign central banks

David Bowman, Etienne Gagnon and Michael P. Leahy
Additional contact information
David Bowman: https://www.federalreserve.gov/econres/david-bowman.htm

No 996, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper reviews the experience of eight major foreign central banks with policy interest rates comparable to the interest rate on excess reserves paid by the Federal Reserve. We pursue two main lines of inquiry: 1) To what extent have these policy interest rates been lower bounds for short-term market rates, and 2) to what extent has tightening that included increasing these policy rates been achieved without reliance on reductions in reserves or other deposits held at the central bank? The foreign experience suggests that policy rate floors can be effective lower bounds for market rates, although incomplete access to central bank accounts and interest on them weakens this result. In addition, the foreign experience suggests that tightening by increasing the interest rate paid on central bank balances can help reduce or eliminate the need to drain balances. These results are consistent with theoretical results that show that tightening without draining is possible, irrespective of whether excess reserves are large or small.

Keywords: Bank reserves; Interest rates (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (26)

Downloads: (external link)
http://www.federalreserve.gov/pubs/ifdp/2010/996/default.htm (text/html)
http://www.federalreserve.gov/pubs/ifdp/2010/996/ifdp996.pdf (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:fip:fedgif:996

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().