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Central bank reserve management: Aggregate targets and interest payments on reserves

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  • Michael Tindall
  • Roger Spencer

Abstract

Tindall and Spencer [1997] presented a dynamic stochastic theory of borrowed reserves that explained the observed nonlinear relationship between borrowing and the spread between the federal funds rate and the discount rate. It showed that borrowed reserves are a function of deposit variation. This paper extends that research, providing a general dynamic model of all key bank reserve aggregates. Nearly all reserve aggregates, which can be used as operating targets by the Federal Reserve, are subject to the influence of deposit variation and are nonlinearly related to the spread between the federal funds rate and the discount rate, complicating their use as targets. Additionally, it is found that the Federal Reserve's proposal to pay interest on bank reserves could generate substantial distortions in reserve aggregate behavior where interest is paid on excess reserves as well as required reserves, effectively resulting in potentially large discount-window policing problems. Copyright International Atlantic Economic Society 2000

Suggested Citation

  • 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.
  • Handle: RePEc:kap:iaecre:v:6:y:2000:i:2:p:178-191:10.1007/bf02296100
    DOI: 10.1007/BF02296100
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    References listed on IDEAS

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    1. Sargent, Thomas & Wallace, Neil, 1985. "Interest on reserves," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 279-290, May.
    2. Bruce D. Smith, 1991. "Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 93-105.
    3. Peristiani, Stavros, 1991. "The Model Structure of Discount Window Borrowing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(1), pages 13-34, February.
    4. 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.
    5. Michael Tindall & Roger Spencer, 1997. "Borrowed reserves and deposit variation: The risks to monetary policy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 25(3), pages 297-306, September.
    6. Dutkowsky, Donald H. & Foote, William G., 1988. "Forecasting discount window borrowing," International Journal of Forecasting, Elsevier, vol. 4(4), pages 593-603.
    7. George S. Tolley, 1957. "Providing for Growth of the Money Supply," Journal of Political Economy, University of Chicago Press, vol. 65, pages 465-465.
    8. Paul R. Krugman & Torsten Persson & Lars E. O. Svensson, 1985. "Inflation, Interest Rates, and Welfare," The Quarterly Journal of Economics, Oxford University Press, vol. 100(3), pages 677-695.
    9. 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.
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