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Fighting Inflation without Massive Transfers to Banks

Author

Listed:
  • Paul De Grauwe

    (London School of Economics and Political Science)

  • Yuemei Ji

    (University College London)

Abstract

The major central banks now operate in a regime of abundant bank reserves. As a result, they can only raise the money market rate by increasing the rate of remuneration of bank reserves. This, in turn, leads to large transfers of central banks' profits to commercial banks that will become unsustainable and renders the transmission of monetary policies less effective. We propose a two-tier system of reserve requirements that would only remunerate the reserves in excess of the minimum required. This would drastically reduce the giveaways to banks, allow the central banks to maintain their current operating procedures and make monetary policies more effective in fighting inflation.

Suggested Citation

  • Paul De Grauwe & Yuemei Ji, 2024. "Fighting Inflation without Massive Transfers to Banks," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 23(4), pages 80-101.
  • Handle: RePEc:mnb:finrev:v:23:y:2024:i:4:p:80-101
    as

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    References listed on IDEAS

    as
    1. Sascha Buetzer, 2022. "Advancing the Monetary Policy Toolkit through Outright Transfers," IMF Working Papers 2022/087, International Monetary Fund.
    2. Ms. Enrica Detragiache & Asli Demirgüç-Kunt, 1998. "Financial Liberalization and Financial Fragility," IMF Working Papers 1998/083, International Monetary Fund.
    3. Buiter, Willem, 2008. "Can Central Banks Go Broke?," CEPR Discussion Papers 6827, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    central banks; inflation; bank reserves; remuneration;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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