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Why Pay Interest on Required Reserve Balances?

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Abstract

The Federal Reserve has paid interest on reserves held by banks in their Fed accounts since 2008. Why should it do so? Here, we describe some benefits of paying interest on required reserve balances. Since forcing banks to hold unremunerated reserves would be akin to levying a tax on them, paying interest on these balances is a way to eliminate or greatly reduce that tax and its negative effects.

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  • Laura Lipscomb & Antoine Martin & Heather Wiggins, 2017. "Why Pay Interest on Required Reserve Balances?," Liberty Street Economics 20170925, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87212
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    File URL: https://libertystreeteconomics.newyorkfed.org/2017/09/why-pay-interest-on-required-reserve-balances.html
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    More about this item

    Keywords

    monetary policy; reserve requirements; Interest on reserves;
    All these keywords.

    JEL classification:

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

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