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Interest on Reserves and the Federal Reserve's Balance Sheet

Author

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  • Dwyer, Gerald P.

Abstract

What are the implications for monetary policy of a central bank's payment of interest on reserves? Is the demand for reserves infinitely elastic if interest is paid at the same rate as is available on government securities, or in the United States, at the Federal Funds rate? In general, the answer is no. Reserves and government securities are perfect substitutes when a government central bank pays interest at the same rate as the rate on government securities. This implies that the Federal Reserve cannot ignore the size of its balance sheet in the aftermath of the financial crisis of 2008.

Suggested Citation

  • Dwyer, Gerald P., 2009. "Interest on Reserves and the Federal Reserve's Balance Sheet," The Journal of Economic Asymmetries, Elsevier, vol. 6(3), pages 15-24.
    • Handle: RePEc:eee:joecas:v:6:y:2009:i:3:p:15-24
    DOI: 10.1016/S1703-4949(16)30049-4
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    More about this item

    Keywords

    E51; E52; E53; Interest on reserves; Bank reserves; Monetary policy; Financial crisis of 2008;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance

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