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Interest on reserves and monetary policy of targeting both interest rate and money supply

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  • Ngotran, Duong

Abstract

We build a dynamic model with currency, demand deposits and bank reserves. The monetary base is controlled by the central bank, while the money supply is determined by the interactions between the central bank, banks and public. In banking crises when banks cut loans, a Taylor rule is not efficient. Negative interest on reserves or forward guidance is effective, but deflation is still likely to be persistent. If the central bank simultaneously targets both the interest rate and the money supply by a Taylor rule and a Friedman's k-percent rule, inflation and output are stabilized.

Suggested Citation

  • Ngotran, Duong, 2017. "Interest on reserves and monetary policy of targeting both interest rate and money supply," MPRA Paper 81579, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:81579
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    File URL: https://mpra.ub.uni-muenchen.de/81579/1/MPRA_paper_81579.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    interest on reserves; negative interest on reserves; forward guidance; monetary base; endogenous money supply;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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