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Interest on Reserves, Interbank Lending, and Monetary Policy

Listed author(s):
  • Williamson, Stephen D.

    ()

    (Federal Reserve Bank of St. Louis)

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.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2015-24.

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Length: 37 pages
Date of creation: 13 Sep 2015
Handle: RePEc:fip:fedlwp:2015-024
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  1. Andolfatto, David & Williamson, Stephen, 2015. "Scarcity of safe assets, inflation, and the policy trap," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 70-92.
  2. Javier Bianchi & Saki Bigio, 2014. "Banks, Liquidity Management and Monetary Policy," NBER Working Papers 20490, National Bureau of Economic Research, Inc.
  3. Aleksander Berentsen & Cyril Monet, 2006. "Monetary Policy in a Channel System," IEW - Working Papers 295, Institute for Empirical Research in Economics - University of Zurich.
  4. Gara M. Afonso & Ricardo Lagos, 2012. "Trade dynamics in the market for federal funds," Staff Reports 549, Federal Reserve Bank of New York.
  5. Stephen D. Williamson, 2012. "Liquidity, Monetary Policy, and the Financial Crisis: A New Monetarist Approach," American Economic Review, American Economic Association, vol. 102(6), pages 2570-2605, October.
  6. Benjamin Lester & Roc Armenter, 2015. "Excess Reserves and Monetary Policy Normalization," 2015 Meeting Papers 586, Society for Economic Dynamics.
  7. Armenter, Roc & Lester, Benjamin, 2016. "Excess Reserves and Monetary Policy Implementation," Working Papers 16-33, Federal Reserve Bank of Philadelphia.
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