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Interest on Reserves as a Main Monetary Policy Tool

George Bratsiotis ()

Economics Discussion Paper Series from Economics, The University of Manchester

Abstract: This paper examines the potential role of the interest on reserves as a main monetary policy tool, in a model of financial intermediation with financial and nominal frictions calibrated to US data (1985-2018). The interest on reserves is shown to affect financial spreads and real economic activity, through its effect on the banking system's reserves (balance sheet channel) and the price of safe liquid assets (intertemporal Euler equation channel). It is shown to provide, (i) determinacy when the interest rate is pegged, independently of the size of reserves, bank capital restrictions, or fiscal policy; (ii) similar welfare improvements to an optimal Taylor rule; (iii) an alternative main monetary policy tool for driving the economy out of recessions when the conventional interest rate is trapped at the zero-lower-bound.

JEL-codes: E31 E32 E44 E50 E52 G28 (search for similar items in EconPapers)
Date: 2021-01, Revised 2022-02
New Economics Papers: this item is included in nep-cba and nep-mon
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