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Excess Reserves and Economic Activity

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Abstract

This paper examines a DSGE environment with endogenous excess reserve holdings in the banking sector. Excess reserves act as an extensive margin of bank lending which is inactive in traditional limited participation models where banks hold minimal reserves by assumption. The results of our model suggest that this extensive margin of bank lending can dampen and even overcome the standard liquidity effect of monetary contractions, amplify the output response to productivity shocks, and bring about large, short-run responses to changes in the interest rate paid on reserves.

Suggested Citation

  • Scott J. Dressler & Erasmus Kersting, 2013. "Excess Reserves and Economic Activity," Villanova School of Business Department of Economics and Statistics Working Paper Series 24, Villanova School of Business Department of Economics and Statistics.
    • Handle: RePEc:vil:papers:24
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    File URL: http://repec.library.villanova.edu/workingpapers/VSBEcon24.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Dia, Enzo & VanHoose, David, 2017. "Banking in macroeconomic theory and policy," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 149-160.
    2. Dutkowsky, Donald H. & VanHoose, David D., 2020. "Equal treatment under the Fed: Interest on reserves, the federal funds rate, and the ‘Third Regime’ of bank behavior," Journal of Economics and Business, Elsevier, vol. 107(C).
    3. George J. Bratsiotis, 2021. "Interest on Reserves as a Main Monetary Policy Tool," Economics Discussion Paper Series 2102, Economics, The University of Manchester, revised Feb 2022.
    4. Edgar A. Ghossoub & Robert R. Reed, 2021. "Banking Competition, Capital Accumulation, And Interest On Reserves," Economic Inquiry, Western Economic Association International, vol. 59(2), pages 671-695, April.
    5. Guillaume A. Khayat, 2017. "The Corridor's Width as a Monetary Policy Tool," Working Papers halshs-01611650, HAL.
    6. George Bratsiotis, 2018. "Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel," Centre for Growth and Business Cycle Research Discussion Paper Series 243, Economics, The University of Manchester.
    7. Hogan, Thomas L., 2021. "Bank lending and interest on excess reserves: An empirical investigation," Journal of Macroeconomics, Elsevier, vol. 69(C).
    8. Ghossoub, Edgar A., 2023. "Economic growth, inflation, and banking sector competition," Economic Modelling, Elsevier, vol. 129(C).
    9. George J. Bratsiotis, 2016. "Liquidity Regulation, Monetary Policy and Welfare," Centre for Growth and Business Cycle Research Discussion Paper Series 228, Economics, The Univeristy of Manchester.
    10. Dutkowsky, Donald H. & VanHoose, David D., 2017. "Interest on reserves, regime shifts, and bank behavior," Journal of Economics and Business, Elsevier, vol. 91(C), pages 1-15.
    11. Dutkowsky, Donald H. & VanHoose, David D., 2018. "Interest on reserves and Federal Reserve unwinding," Journal of Economics and Business, Elsevier, vol. 97(C), pages 28-38.
    12. Dutkowsky, Donald H. & VanHoose, David D., 2018. "Breaking up isn’t hard to do: Interest on reserves and monetary policy," Journal of Economics and Business, Elsevier, vol. 99(C), pages 15-27.
    13. Oxana Afanasyeva & Dmitriy Korovin, 2020. "The impact of reserve requirements of central banks on macroeconomic indicators," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 8(1), pages 413-429, September.
    14. George J. Bratsiotis, 2018. "Credit Risk, Excess Reserves and Monetary Policy: The Deposits," Centre for Growth and Business Cycle Research Discussion Paper Series 236, Economics, The University of Manchester.

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    More about this item

    Keywords

    Financial Intermediation; Excess Reserves; Liquidity Effect; Output Amplification;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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