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Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel

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  • Bratsiotis, George J.

Abstract

This paper examines the role of the precautionary demand for liquidity and the interest on reserves as two potential determinants of the deposits channel that can help explain the role of monetary policy, particularly at the near zero-bound. At high levels of precautionary liquidity hoarding the optimal policy response of a Taylor rule is shown to indicate a zero weight on inflation. This result is explained by the effect that the demand for liquidity has on the deposit rate which determines the intertemporal choices of households. Similarly, through its effect on the deposits channel the interest on reserves can act as the main tool of monetary policy, that is shown to provide higher welfare gains in relation to a simple Taylor rule. This result is shown to hold at the zero-bound and it is independent of the precautionary demand for liquidity, or fiscal theory of the price level properties.

Suggested Citation

  • Bratsiotis, George J., 2018. "Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel," EconStor Preprints 172770, ZBW - German National Library of Economics.
    • Handle: RePEc:zbw:esprep:172770
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    File URL: https://www.econstor.eu/bitstream/10419/173232/1/GB2018DepositsChannel.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Deposits channel; zero-bound monetary policy; excess reserves; credit risk; balance sheet channel; interest on reserves; required reserve ratio; welfare; DSGE models;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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