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Why are banks holding so many excess reserves?

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Author Info

  • Todd Keister
  • James J. McAndrews

Abstract

The buildup of reserves in the U.S. banking system during the financial crisis has fueled concerns that the Federal Reserve's policies may have failed to stimulate the flow of credit in the economy: banks, it appears, are amassing funds rather than lending them out. However, a careful examination of the balance sheet effects of central bank actions shows that the high level of reserves is simply a by-product of the Fed's new lending facilities and asset purchase programs. The total quantity of reserves in the banking system reflects the scale of the Fed's policy initiatives, but conveys no information about the initiatives' effects on bank lending or on the economy more broadly.

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Bibliographic Info

Article provided by Federal Reserve Bank of New York in its journal Current Issues in Economics and Finance.

Volume (Year): 15 (2009)
Issue (Month): Dec ()
Pages:

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Handle: RePEc:fip:fednci:y:2009:i:dec:n:v.15no.8

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Related research

Keywords: Bank reserves ; Liquidity (Economics) ; Inflation (Finance) ; Federal Reserve System;

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References

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  1. Sumner Scott, 2009. "Comment on Brad Delong: Can We Generate Controlled Reflation in a Liquidity Trap?," The Economists' Voice, De Gruyter, vol. 6(4), pages 1-2, March.
  2. Huberto M. Ennis & Todd Keister, 2008. "Understanding monetary policy implementation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 235-263.
  3. Huberto M. Ennis & John A. Weinberg, 2007. "Interest on reserves and daylight credit," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 111-142.
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