Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered

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Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered

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Smith, Bruce D

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Bruce D. Smith

Abstract

M. Friedman's (1960) proposal to pay interest on (required) reserves is considered in a setting that eliminates the indeterminacy of steady-state equilibrium discussed by T. J. Sargent and N. Wallace (1985). In an overlapping-generations model where the real rate of interest is technologically determined, the payment of interest on reserves results in a determinate, Pareto optimal steady-state equilibrium. However, interest payments on reserves reduce the steady-state welfare of all young agents and, for many economies, results in the existence of stationary sunspot equilibria. This is the case even if such equilibria cannot exist when reserves do not earn interest. Copyright 1991 by The Review of Economic Studies Limited.

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Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 58 (1991)
Issue (Month): 1 (January)
Pages: 93-105
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Handle: RePEc:bla:restud:v:58:y:1991:i:1:p:93-105

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Paper
- Smith, B.D., 1988. "Interest On Reserves And Sunspot Equilibria: Friedman'S Proposal Reconsidered," RCER Working Papers 119, University of Rochester - Center for Economic Research (RCER).

Cited by:
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Mark G. Guzman, 2006. "The impact of paying interest on reserves in the presence of government deficit financing," Economics & Management Discussion Papers em-dp2006-39, Henley Business School, Reading University. [Downloadable!]
Other versions:
- Mark G. Guzman, 2007. "The Impact of Paying Interest on Reserves in the Presence of Government Deficit Financing," Money Macro and Finance (MMF) Research Group Conference 2006 92, Money Macro and Finance Research Group. [Downloadable!]
- Mark G. Guzman, 2006. "The impact of paying interest on reserves in the presence of government deficit financing," Economic Analysis Research Group Working Papers earg-wp2006-08, Henley Business School, Reading University. [Downloadable!]
- Mark G. Guzman, 2004. "The impact of paying interest on reserves in the presence of government deficit financing," Working Papers 04-06, Federal Reserve Bank of Dallas. [Downloadable!]
- Mark G. Guzman, 2008. "The Impact Of Paying Interest On Reserves In The Presence Of Government Deficit Financing," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 624-642, October. [Downloadable!] (restricted)
Bhattacharya, Joydeep & Haslag, Joseph & Russell, Steven, 2004. "The Role of Money in Two Alternative Models: When is the Friedman Rule Optimal, and Why?," Staff General Research Papers 11950, Iowa State University, Department of Economics. [Downloadable!]
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- Bhattacharya, Joydeep & Haslag, Joseph & Russell, Steven, 2005. "The role of money in two alternative models: When is the Friedman rule optimal, and why?," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1401-1433, November. [Downloadable!] (restricted)
Huberto M. Ennis & Todd Keister, 2003. "Aggregate demand management with multiple equilibria," Working Paper 03-04, Federal Reserve Bank of Richmond. [Downloadable!]
Joe Haslag & Joydeep Bhattacharya & Steven Russell, 2003. "Understanding the Roles of Money, or When is the Friedman Rule Optimal, and Why?," Working Papers 0301, Department of Economics, University of Missouri. [Downloadable!]
Joseph H. Haslag, 1995. "A comparison of alternative monetary environments," Working Papers 95-11, Federal Reserve Bank of Dallas. [Downloadable!]
William Roberds, 1997. "What's really new about the new forms of retail payment?," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 32-45. [Downloadable!]
Beatrix Paal & Bruce D. Smith, 2001. "The sub-optimality of the Friedman rule and the optimum quantity of money," IEHAS Discussion Papers 0113, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
Costas Azariadis & James Bullard & Lee Ohanian, 2001. "Trend-reverting fluctuations in the life-cycle model," Working Papers 1998-015, Federal Reserve Bank of St. Louis. [Downloadable!]
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- Azariadis, Costas & Bullard, James & Ohanian, Lee, 2004. "Trend-reverting fluctuations in the life-cycle model," Journal of Economic Theory, Elsevier, vol. 119(2), pages 334-356, December. [Downloadable!] (restricted)
Marco Espinosa-Vega & Steven Russell, 1999. "A public finance analysis of multiple reserve requirements," Working Paper 99-19, Federal Reserve Bank of Atlanta. [Downloadable!]
Other versions:
- Marco Espinosa-Vega & Steven Russell, 1998. "A public finance analysis of multiple reserve requirements," Working Paper 98-1, Federal Reserve Bank of Atlanta. [Downloadable!]
Hueth, Brent & Ibarbaru, Maro & Kliebenstein, James, 2006. "Business Organization and Coordination in Marketing Specialty Hogs: A Comparative Analysis of Two Firms from Iowa," Staff General Research Papers 11328, Iowa State University, Department of Economics. [Downloadable!]
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- Hueth, Brent & Ibarburu, Maro & Kliebenstein, James, 2005. "Business Organization and Coordination in Marketing Specialty Hogs: A Comparative Analysis of Two Firms from Iowa," Staff General Research Papers 12479, Iowa State University, Department of Economics. [Downloadable!]
- Brent Hueth & Maro Ibarburu & James Kliebenstein, 2005. "Business Organization and Coordination in Marketing Specialty Hogs: A Comparative Analysis of Two Firms from Iowa," Center for Agricultural and Rural Development (CARD) Publications 05-wp415, Center for Agricultural and Rural Development (CARD) at Iowa State University. [Downloadable!]
Richard C. Barnett & Joydeep Bhattacharya, 2007. "Rejuveniles and Growth," Economics Working Papers 2007-11, School of Economics and Management, University of Aarhus. [Downloadable!]
Other versions:
- Barnett, Richard & Bhattacharya, Joydeep, 2006. "Rejuveniles and Growth," Staff General Research Papers 12653, Iowa State University, Department of Economics. [Downloadable!]
- Barnett, Richard C. & Bhattacharya, Joydeep, 2008. "Rejuveniles and growth," European Economic Review, Elsevier, vol. 52(6), pages 1055-1071, August. [Downloadable!] (restricted)
Marvin Goodfriend, 2002. "Interest on reserves and monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 77-84. [Downloadable!]
Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI). [Downloadable!]
Stacey L. Schreft & Bruce D. Smith, 2001. "The conduct of monetary policy with a shrinking stock of government debt," Research Working Paper RWP 01-09, Federal Reserve Bank of Kansas City. [Downloadable!]
Other versions:
- Stacey L. Schreft & Bruce D. Smith, 2002. "The conduct of monetary policy with a shrinking stock of government debt," Proceedings, Federal Reserve Bank of Cleveland, pages 848-886.
- Schreft, Stacey L & Smith, Bruce D, 2002. "The Conduct of Monetary Policy with a Shrinking Stock of Government Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 848-82, August.
Sanjay Banerji & Ngo Van Long, 2000. "Can Financial Intermediation Induce Economic Fluctuations?," CIRANO Working Papers 2000s-51, CIRANO. [Downloadable!]
Scott Freeman & Joseph H. Haslag, 1995. "Should bank reserves earn interest?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 25-33. [Downloadable!]

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