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Interest on reserves, unregulated interest on demand deposits, and optimal sweeping

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  • Dutkowsky, Donald H.
  • VanHoose, David D.

Abstract

This paper examines the joint determination of the interest rate on demand deposits and swept funds given interest on reserves and the elimination of Regulation Q. Our model works within monopolistically competitive loan and deposit markets and incorporates sweeping from deposit accounts to reserve-exempt accounts. Under unregulated deposit rates, we derive solutions for the market equilibrium values of the deposit rate and the share of deposits allocated to swept funds. Sweeping responds positively to the interbank loan rate and marginal resource costs for unswept funds, and negatively to the interest rate on reserves, reserve ratio, and the marginal resource cost of sweeping. The deposit rate responds positively to the interbank loan rate, interest rate on reserves, and reserve ratio, but negatively to marginal resource costs of sweeping and holding unswept funds. We also investigate deposit market equilibrium under a zero deposit rate restriction with sweeping. Here, the share of swept funds and the portion of the interbank rate passed on to swept balances adjust to attain market equilibrium. Sweeping enables banks to replicate outcomes from unhindered deposit rate competition. The equilibrium return that banks pay depositors and the share of swept funds are the same as with unrestricted deposit rates.

Suggested Citation

  • Dutkowsky, Donald H. & VanHoose, David D., 2013. "Interest on reserves, unregulated interest on demand deposits, and optimal sweeping," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 192-202.
    • Handle: RePEc:eee:jmacro:v:38:y:2013:i:pb:p:192-202
    DOI: 10.1016/j.jmacro.2013.08.001
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    References listed 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. Glocker, Christian, 2019. "Do reserve requirements reduce the risk of bank failure?," MPRA Paper 95634, University Library of Munich, Germany.
    3. 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.
    4. Fleissig, Adrian R. & Jones, Barry E., 2015. "The impact of commercial sweeping on the demand for monetary assets during the Great Recession," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 412-422.
    5. 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.
    6. 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

    Sweep programs; Interest on demand deposits; Interest on reserves; Banking;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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