Interest on Reserves, Interbank Lending, and Monetary Policy
Stephen Williamson ()
No 428, 2016 Meeting Papers from Society for Economic Dynamics
A two-sector general equilibrium banking model is constructed to study the functioning of a floor system of central bank intervention. Only retail banks can hold reserves, and these banks are also subject to a capital requirement, which creates "balance sheet costs" of holding reserves. An increase in the interest rate on reserves has very different qualitative effects from a reduction in the central bank's balance sheet. Increases in the central bank's balance sheet can have redistributive effects, and can reduce welfare. A reverse repo facility at the central bank puts a floor under the interbank interest rate, and is always welfare improving. However, an increase in reverse repos outstanding can increase the margin between the interbank interest rate and the interest rate on government debt.
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Working Paper: Interest on Reserves, Interbank Lending, and Monetary Policy (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:428
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