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Abstract: The Macroeconomic Effects of Allowing Interest Payment on Demand Deposits

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  • Lloyd-Davies, Peter

Abstract

This papaer assesses some of the costs and benefits of aloowing banks to pay interest on demand deposits. With the help of a simple short-run model of the financial sector, it is shown that, barring a possible but unlikely perverse reaction, the deposit rate will tend to move in the same direction as other rates. This will moderate changes in the money supply accompanying a given change in interest rates; conversely, a given change in the excess demand for money will cause larger fluctuations in the level of interest rates. This can either be good or bad; if the excess demand for money corresponds to an excess demand for real output, the wider fluctuations in the interest rate will be more effective in eliminating it.

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  • Lloyd-Davies, Peter, 1977. "Abstract: The Macroeconomic Effects of Allowing Interest Payment on Demand Deposits," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 647-647, November.
    • Handle: RePEc:cup:jfinqa:v:12:y:1977:i:04:p:647-647_02
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