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A note on bank lending in times of large bank reserves

  • Antoine Martin
  • James McAndrews
  • David Skeie

The amount of reserves held by the U.S. banking system reached $1.5 trillion in April 2011. Some economists argue that such a large quantity of bank reserves could lead to overly expansive bank lending as the economy recovers, regardless of the Federal Reserve’s interest rate policy. In contrast, we show that the size of bank reserves has no effect on bank lending in a frictionless model of the current banking system, in which interest is paid on reserves and there are no binding reserve requirements. We also examine the potential for balance-sheet cost frictions to distort banks’ lending decisions. We find that large reserve balances do not lead to excessive bank credit and may instead be contractionary.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 497.

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Date of creation: 2011
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Handle: RePEc:fip:fednsr:497
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  1. Xavier Freixas & Antoine Martin & David Skeie, 2009. "Bank liquidity, interbank markets, and monetary policy," Staff Reports 371, Federal Reserve Bank of New York.
  2. Todd Keister & Antoine Martin & James McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56.
  3. Adam Ashcraft & James McAndrews & David Skeie, 2009. "Precautionary reserves and the interbank market," Staff Reports 370, Federal Reserve Bank of New York.
  4. Huberto M. Ennis & Todd Keister, 2008. "Understanding monetary policy implementation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 235-263.
  5. Todd Keister & James J. McAndrews, 2009. "Why are banks holding so many excess reserves?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Dec).
  6. repec:dgr:kubcen:201035s is not listed on IDEAS
  7. Paul Bennett & Stavros Peristiani, 2002. "Are U.S. reserve requirements still binding?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 53-68.
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