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Interest on excess reserves as a monetary policy instrument: the experience of foreign central banks

Author

Listed:
  • David Bowman
  • Etienne Gagnon
  • Michael P. Leahy

Abstract

This paper reviews the experience of eight major foreign central banks with policy interest rates comparable to the interest rate on excess reserves paid by the Federal Reserve. We pursue two main lines of inquiry: 1) To what extent have these policy interest rates been lower bounds for short-term market rates, and 2) to what extent has tightening that included increasing these policy rates been achieved without reliance on reductions in reserves or other deposits held at the central bank? The foreign experience suggests that policy rate floors can be effective lower bounds for market rates, although incomplete access to central bank accounts and interest on them weakens this result. In addition, the foreign experience suggests that tightening by increasing the interest rate paid on central bank balances can help reduce or eliminate the need to drain balances. These results are consistent with theoretical results that show that tightening without draining is possible, irrespective of whether excess reserves are large or small.

Suggested Citation

  • David Bowman & Etienne Gagnon & Michael P. Leahy, 2010. "Interest on excess reserves as a monetary policy instrument: the experience of foreign central banks," International Finance Discussion Papers 996, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:996
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    Citations

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    Cited by:

    1. Friedman, Benjamin M. & Kuttner, Kenneth N., 2010. "Implementation of Monetary Policy: How Do Central Banks Set Interest Rates?," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 24, pages 1345-1438 Elsevier.
    2. Goodfriend, Marvin, 2011. "Central banking in the credit turmoil: An assessment of Federal Reserve practice," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 1-12, January.
    3. Nellie Zhang, 2012. "Estimating the Demand for Settlement Balances in the Canadian Large Value Transfer System," Staff Working Papers 12-15, Bank of Canada.
    4. Tatom, John A., 2014. "U.S. monetary policy in disarray," Journal of Financial Stability, Elsevier, vol. 12(C), pages 47-58.
    5. Chang, Su-Hsin & Contessi, Silvio & Francis, Johanna L., 2014. "Understanding the accumulation of bank and thrift reserves during the U.S. financial crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 78-106.
    6. Keister, Todd & Martin, Antoine & McAndrews, James J., 2015. "Floor systems and the Friedman rule: the fiscal arithmetic of open market operations," Staff Reports 754, Federal Reserve Bank of New York.
    7. Barnes, Michelle L., 2014. "Let's talk about it: what policy tools should the Fed "normally" use?," Current Policy Perspectives 14-12, Federal Reserve Bank of Boston.
    8. Chiu, Jonathan & Monnet, Cyril, 2016. "Relationships in the interbank market," Working Paper Series 5210, Victoria University of Wellington, School of Economics and Finance.
    9. Gyula Pulay & János Máté & Ildikó Németh & Andrásné Zelei, 2013. "Budgetary Risks of Monetary Policy with Special Regard to the Debt Rule," Public Finance Quarterly, State Audit Office of Hungary, vol. 58(1), pages 11-34.
    10. Aloísio Araújo & Susan Schommer & Michael Woodford, 2015. "Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 1-43, January.
    11. Vollmer, Uwe & Wiese, Harald, 2016. "Central bank standing facilities, counterparty risk, and OTC-interbank lending," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 101-122.
    12. Alfonso Palacio-Vera, 2011. "Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate," Economics Working Paper Archive wp_685, Levy Economics Institute.
    13. Morten L. Bech & Antoine Martin & James J. McAndrews, 2012. "Settlement liquidity and monetary policy implementation—lessons from the financial crisis," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 3-20.
    14. Claudio Borio & Anna Zabai, 2016. "Unconventional monetary policies: a re-appraisal," BIS Working Papers 570, Bank for International Settlements.
    15. Stefan Nagel, 2016. "The Liquidity Premium of Near-Money Assets," The Quarterly Journal of Economics, Oxford University Press, vol. 131(4), pages 1927-1971.
    16. George A. Kahn, 2010. "Monetary policy under a corridor operating framework," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-34.
    17. repec:gam:jijfss:v:6:y:2018:i:1:p:23-:d:132744 is not listed on IDEAS

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    Keywords

    Bank reserves ; Interest rates;

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