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The Optimal Conduct of Monetary Policy with Interest on Reserves

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  • Anil K. Kashyap
  • Jeremy C. Stein
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    Abstract

    In a world with interest on reserves, the central bank has two distinct tools that it can use to raise the short-term policy rate: it can either increase the interest it pays on reserve balances, or it can reduce the quantity of reserves in the system. We argue that by using both of these tools together, and by broadening the scope of reserve requirements, the central bank can simultaneously pursue two objectives: it can manage the inflation-output tradeoff using a Taylor-type rule, and it can regulate the externalities created by socially excessive shortterm debt issuance on the part of financial intermediaries. (JEL E43, E52, E58, G21)

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.4.1.266
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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

    Volume (Year): 4 (2012)
    Issue (Month): 1 (January)
    Pages: 266-82

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    Handle: RePEc:aea:aejmac:v:4:y:2012:i:1:p:266-82

    Note: DOI: 10.1257/mac.4.1.266
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    References

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    1. Todd Keister & Antoine Martin & James McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56.
    2. Andrei Shleifer & Robert W. Vishny, 2009. "Unstable Banking," NBER Working Papers 14943, National Bureau of Economic Research, Inc.
    3. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153.
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    Cited by:
    1. Primus, Keyra, 2013. "Excess Reserves, Monetary Policy and Financial Volatility," MPRA Paper 51670, University Library of Munich, Germany.
    2. Christian Glocker & Pascal Towbin, 2012. "The Macroeconomic Effects of Reserve Requirements," WIFO Working Papers 420, WIFO.
    3. Jin Cao & LorĂ¡n Chollete, 2013. "Central Banking and Financial Stability in the Long Run," CESifo Working Paper Series 4272, CESifo Group Munich.
    4. Elsamadisy, Elsayed Mousa & Alkhater, Khalid Rashid & Basher, Syed Abul, 2013. "Pre- versus Post-Crisis Central Banking in Qatar," MPRA Paper 45310, University Library of Munich, Germany.
    5. Antoine Martin & James McAndrews & Ali Palida & David Skeie, 2013. "Federal Reserve tools for managing rates and reserves," Staff Reports 642, Federal Reserve Bank of New York.
    6. Keyra Primus, 2013. "'Excess Reserves, Monetary Policy and Financial Volatility," Centre for Growth and Business Cycle Research Discussion Paper Series 183, Economics, The Univeristy of Manchester.

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