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The Macroeconomic Effects on Interest on Reserves

  • Peter N. Ireland

    ()

    (Boston College)

This paper uses a New Keynesian model with banks and deposits, calibrated to match the US economy, to study the macroeconomic effects of policies that pay interest on reserves. While their effects on output and inflation are small, these policies require important adjustments in the way that the monetary authority manages the supply of reserves, as liquidity effects vanish and households' portfolio shifts increase banks' demand for reserves when short-term interest rates rise. Money and monetary policy remain linked in the long run, however, since policy actions that change the price level must change the supply of reserves proportionately.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 772.

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Date of creation: 01 Feb 2011
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Handle: RePEc:boc:bocoec:772
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  20. Morten L. Bech & Elizabeth Klee, 2010. "The mechanics of a graceful exit: interest on reserves and segmentation in the federal funds market," Finance and Economics Discussion Series 2010-07, Board of Governors of the Federal Reserve System (U.S.).
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  27. Cysne, Rubens Penha & Turchick, David, 2007. "An Ordering of Measures of the Welfare Cost of Inflation in Economies with Interest-Bearing Deposits," Economics Working Papers (Ensaios Economicos da EPGE) 659, FGV/EPGE Escola Brasileira de Economia e Finan├žas, Getulio Vargas Foundation (Brazil).
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