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Should bank reserves earn interest?

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  • Scott Freeman
  • Joseph H. Haslag

Abstract

This article examines the effects and desirability of paying interest on required reserves. Scott Freeman and Joseph Haslag demonstrate that a policy of paying interest on reserves can make everyone better off, even if the interest must be financed by a tax on capital. An essential part of this policy is an open market operation that offsets any changes in the value of money.

Suggested Citation

  • 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.
    • Handle: RePEc:fip:fedder:y:1995:i:qiv:p:25-33
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    File URL: https://www.dallasfed.org/~/media/documents/research/er/1995/er9504c.pdf
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    References listed on IDEAS

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    1. Bacchetta, Philippe & Caminal, Ramon, 1994. "A note on reserve requirements and public finance," International Review of Economics & Finance, Elsevier, vol. 3(1), pages 107-118.
    2. Sargent, Thomas & Wallace, Neil, 1985. "Interest on reserves," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 279-290, May.
    3. Bruce D. Smith, 1991. "Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 93-105.
    4. Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 598-606, May/June.
    5. Freeman, Scott, 1987. "Reserve requirements and optimal seigniorage," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 307-314, March.
    6. Haslag, Joseph H. & Hein, Scott E., 1995. "Does it matter how monetary policy is implemented?," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 359-386, April.
    7. Romer, David, 1985. "Financial intermediation, reserve requirements, and inside money: A general equilibrium analysis," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 175-194, September.
    8. Joshua N. Feinman, 1993. "Reserve requirements: history, current practice, and potential reform," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 569-589.
    9. Kimbrough, Kent, 1989. "Optimal taxation in a monetary economy with financial intrmediaries," Journal of Macroeconomics, Elsevier, vol. 11(4), pages 493-511.
    10. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
    11. George S. Tolley, 1957. "Providing for Growth of the Money Supply," Journal of Political Economy, University of Chicago Press, vol. 65(6), pages 465-465.
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    Cited by:

    1. Gomis-Porqueras, Pedro & Peralta-Alva, Adrian, 2010. "Optimal monetary and fiscal policies in a search theoretic model of monetary exchange," European Economic Review, Elsevier, vol. 54(3), pages 331-344, April.
    2. Bindseil, Ulrich, 1997. "Reserve requirements and economic stabilization," Discussion Paper Series 1: Economic Studies 1997,01e, Deutsche Bundesbank.
    3. VanHoose, David D. & Humphrey, David B., 2001. "Sweep accounts, reserve management, and interest rate volatility1," Journal of Economics and Business, Elsevier, vol. 53(4), pages 387-404.
    4. David VanHoose, 2008. "Interest on Reserves: Implications for Banking and Policymaking," NFI Policy Briefs 2008-PB-05, Indiana State University, Scott College of Business, Networks Financial Institute.
    5. Michael Tindall & Roger Spencer, 2000. "Central bank reserve management: Aggregate targets and interest payments on reserves," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 6(2), pages 178-191, May.
    6. Bindseil, Ulrich, 1997. "Die Stabilisierungswirkungen von Mindestreserven," Discussion Paper Series 1: Economic Studies 1997,01, Deutsche Bundesbank.

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