The impact of paying interest on reserves in the presence of government deficit financing
This paper re-examines the impact that paying interest on reserves has on price level indeterminacy, volatility, and economic well-being. Unlike the previous literature, this model includes an after-tax deficit that must be financed by assets (bonds and reserves) whose returns are linked. I show the number of steady state equilibria is equal to, or greater than, the number arising in the nointerest economy. Consequently, the level of indeterminacy is equal to, or greater than, in the no-interest economy. When the level of indeterminacy is the same, then economic volatility is reduced by paying interest. However, greater indeterminacy in the interest economy, results in greater volatility. Paying interest on reserves can enhance welfare and, under certain conditions, unpleasant monetarist arithmetic may also obtain.
|Date of creation:||2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (0) 118 378 8226
Fax: +44 (0) 118 975 0236
Web page: http://www.henley.reading.ac.uk/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jeffrey M. Lacker, 1997.
"Clearing, settlement, and monetary policy,"
97-01, Federal Reserve Bank of Richmond.
- Scott Freeman & Joseph H. Haslag, 1993.
"On the optimality of interest-bearing reserves in economies of overlapping generations,"
9328, Federal Reserve Bank of Dallas.
- Freeman, Scott & Haslag, Joseph H, 1996. "On the Optimality of Interest-Bearing Reserves in Economies of Overlapping Generations," Economic Theory, Springer, vol. 7(3), pages 557-65, April.
- Scott Freeman & Joseph H. Haslag, 1996. "On the optimality of interest-bearing reserves in economies of overlapping generations (*)," Economic Theory, Springer, vol. 7(3), pages 557-565.
- Robert E. Hall, 1999.
"Controlling the Price Level,"
NBER Working Papers
6914, National Bureau of Economic Research, Inc.
- Bruce D. Smith, 1984. "Money and inflation in colonial Massachusetts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
- Marvin Goodfriend, 2002. "Interest on reserves and monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 77-84.
- Neil Wallace, 1984. "Some of the choices for monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
- Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
- Charles Goodhart, 2000. "Can Central Banking Survive the IT Revolution?," FMG Special Papers sp125, Financial Markets Group.
- Mark Toma, 1999. "A Positive Model of Reserve Requirements and Interest on Reserves: A Clearinghouse Interpretation of the Federal Reserve System," Southern Economic Journal, Southern Economic Association, vol. 66(1), pages 101-116, July.
- Bhattacharya, Joydeep & Guzman, Mark G. & Smith, Bruce D., 1998.
"Some Even More Unpleasant Monetarist Arithmetic,"
Staff General Research Papers
5084, Iowa State University, Department of Economics.
- Marco Espinosa & Steven Russell, 1998. "Can a Policy of Higher Inflation Reduce Real Interests in the Long Run?," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 92-103, February.
- Dwyer, Gerald Jr. & Saving, Thomas R., 1986. "Government revenue from money creation with government and private money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 239-249, March.
- Goodhart, Charles A E, 2000. "Can Central Banking Survive the IT Revolution?," International Finance, Wiley Blackwell, vol. 3(2), pages 189-209, July.
- Smith, B.D., 1988.
"Interest On Reserves And Sunspot Equilibria: Friedman'S Proposal Reconsidered,"
RCER Working Papers
119, University of Rochester - Center for Economic Research (RCER).
- Smith, Bruce D, 1991. "Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 93-105, January.
- Sargent, Thomas & Wallace, Neil, 1985. "Interest on reserves," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 279-290, May.
When requesting a correction, please mention this item's handle: RePEc:rdg:emxxdp:em-dp2006-39. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ed Quick)
If references are entirely missing, you can add them using this form.