Why Pay Interest on Required Reserve Balances?

Laura Lipscomb, Antoine Martin and Heather Wiggins
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Laura Lipscomb: https://www.federalreserve.gov/econres/laura-lipscomb.htm

No 20170925, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: The Federal Reserve has paid interest on reserves held by banks in their Fed accounts since 2008. Why should it do so? Here, we describe some benefits of paying interest on required reserve balances. Since forcing banks to hold unremunerated reserves would be akin to levying a tax on them, paying interest on these balances is a way to eliminate or greatly reduce that tax and its negative effects.

Keywords: monetary policy; reserve requirements; Interest on reserves (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Date: 2017-09-25
New Economics Papers: this item is included in nep-mac and nep-mon
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