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A note on bank lending in times of large bank reserves

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Author Info

  • Antoine Martin
  • James McAndrews
  • David Skeie

Abstract

The amount of reserves held by the U.S. banking system reached $1.5 trillion in April 2011. Some economists argue that such a large quantity of bank reserves could lead to overly expansive bank lending as the economy recovers, regardless of the Federal Reserve’s interest rate policy. In contrast, we show that the size of bank reserves has no effect on bank lending in a frictionless model of the current banking system, in which interest is paid on reserves and there are no binding reserve requirements. We also examine the potential for balance-sheet cost frictions to distort banks’ lending decisions. We find that large reserve balances do not lead to excessive bank credit and may instead be contractionary.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 497.

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Date of creation: 2011
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Handle: RePEc:fip:fednsr:497

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Related research

Keywords: Bank reserves ; Bank loans ; Interest;

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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. Xavier Freixas & Antoine Martin & David Skeie, 2010. "Bank liquidity, interbank markets and monetary policy," Economics Working Papers 1202, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Paul Bennett & Stavros Peristiani, 2002. "Are U.S. reserve requirements still binding?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 53-68.
  4. Todd Keister & James J. McAndrews, 2009. "Why are banks holding so many excess reserves?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Dec).
  5. Huberto M. Ennis & Todd Keister, 2008. "Understanding monetary policy implementation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 235-263.
  6. Adam Ashcraft & James Mcandrews & David Skeie, 2011. "Precautionary Reserves and the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 311-348, October.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Il mito del “finanziamento monetario” della spesa pubblica
    by keynesblog in Keynes Blog on 2012-12-13 14:30:07
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Cited by:
  1. Jose Berrospide, 2013. "Bank liquidity hoarding and the financial crisis: an empirical evaluation," Finance and Economics Discussion Series 2013-03, Board of Governors of the Federal Reserve System (U.S.).
  2. Diana Hancock & Wayne Passmore, 2012. "The Federal Reserve's portfolio and its effects on mortgage markets," Finance and Economics Discussion Series 2012-22, Board of Governors of the Federal Reserve System (U.S.).
  3. John C. Williams, 2011. "Economics instruction and the brave new world of monetary policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue june6.
  4. Lawrence L Kreicher & Robert N McCauley & Patrick McGuire, 2013. "The 2011 FDIC assessment on banks managed liabilities: interest rate and balance-sheet responses," BIS Working Papers 413, Bank for International Settlements.
  5. Marlene Amstad & Antoine Martin, 2011. "Monetary policy implementation: common goals but different practices," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 17(Nov).

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