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Interest on Reserves, Interbank Lending, and Monetary Policy

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  • Stephen D. Williamson

Abstract

A two-sector general equilibrium banking model is constructed to study the functioning of a floor system of central bank intervention. Only retail banks can hold reserves, and these banks are also subject to a capital requirement, which creates ?balance sheet costs? of holding reserves. An increase in the interest rate on reserves has very different qualitative effects from a reduction in the central bank?s balance sheet. Increases in the central bank?s balance sheet can have redistributive effects, and can reduce welfare. A reverse repo facility at the central bank puts a floor un- der the interbank interest rate, and is always welfare improving. However, an increase in reverse repos outstanding can increase the margin between the interbank interest rate and the interest rate on government debt.

Suggested Citation

  • Stephen D. Williamson, 2015. "Interest on Reserves, Interbank Lending, and Monetary Policy," Working Papers 2015-24, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2015-024
    DOI: 10.20955/wp.2015.024
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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