The Politics of Paying Interest on Bank Reserves
The Federal Reserve has recently activated its newly acquired powers to pay interest on reserves of depository institutions. The Fed maintains that its new policy increases economic efficiency and intends it to play a lead role in the exit from quantitative easing. This paper argues it is a bad policy that has a deflationary bias; is costly to taxpayers, and that cost will increase as normal conditions return; and establishes institutional lock-in that obstructs desirable changes to regulatory policy. The paper recommends repealing the Fed's power to pay interest on bank reserves. Second, the Fed should repeal regulation Q, which prohibits payment of interest on demand deposits. Third, the Fed should immediately implement an alternative system of asset-based reserve requirements (liquidity ratios) that will improve monetary control and can help exit quantitative easing at no cost to the public purse. Now is the optimal time for this change.
Volume (Year): 53 (2010)
Issue (Month): 3 (May)
|Contact details of provider:|| Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=106043|
When requesting a correction, please mention this item's handle: RePEc:mes:challe:v:53:y:2010:i:3:p:49-65. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Nguyen)The email address of this maintainer does not seem to be valid anymore. Please ask Chris Nguyen to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.