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Does Paying Interest on Bank Reserves Improve Welfare?

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  • Ross Milbourne

Abstract

Most partial equilibrium analyses argue that the Central Bank should pay interest to the commercial banks on the reserves those banks are required to hold. This paper argues that such a proposal might no be welfare improving because in general equilibrium there is a tax burden that this payment creates. A simple model is presented and the crucial condition upon whether, in general equilibrium, these interest payments are welfare-improving are derived. The conditions are slight counter intuitive and casual empiricism suggests that such payments probably are not welfare improving.

Suggested Citation

  • Ross Milbourne, 1988. "Does Paying Interest on Bank Reserves Improve Welfare?," Working Paper 718, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:718
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