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The Optimal Conduct of Monetary Policy with Interest on Reserves

  • Anil K. Kashyap
  • Jeremy C. Stein
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    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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    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
    Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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    1. Carlos Montoro & Ramon Moreno, 2011. "The use of reserve requirements as a policy instrument in Latin America," BIS Quarterly Review, Bank for International Settlements, March.
    2. Vasco Curdia & Michael Woodford, 2010. "The Central Bank Balance Sheet as an Instrument of Monetary Policy," Discussion Papers 0910-16, Columbia University, Department of Economics.
    3. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    4. Andrei Shleifer & Robert W. Vishny, 2009. "Unstable Banking," NBER Working Papers 14943, National Bureau of Economic Research, Inc.
    5. 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.
    6. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153, March.
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