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Excess Reserves and Economic Activity

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.

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File URL: http://repec.library.villanova.edu/workingpapers/VSBEcon24.pdf
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Paper provided by Villanova School of Business Department of Economics and Statistics in its series Villanova School of Business Department of Economics and Statistics Working Paper Series with number 24.

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Date of creation: Jul 2013
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Handle: RePEc:vil:papers:24
Contact details of provider: Web page: http://www.villanova.edu/business/facultyareas/economics/

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