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Achieving Price Stability by Manipulating the Central Bank's Payment on Reserves

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Abstract

Today, all major central banks pay or collect interest on reserves, and stand ready to use the interest rate as an instrument of monetary policy. We show that by paying an appropriate rate on reserves, the central bank can pin the price level uniquely to a target. The essential idea is to index reserves to the market interest rate, the price level, and the target price level in a way that creates a contractionary financial force if the price level is above the target and an expansionary force if below. Our payment-on-reserves policy process does not require terminal conditions like Taylor rules, exogenous fiscal surpluses like the fiscal theory of the price level, liquidity preference as in quantity theories, or local approximations as in new Keynesian models. The process accommodates liquidity services from reserves, segmented financial markets where only some institutions can hold reserves, and nominal rigidities. We believe it would be easy to implement.

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  • Hall, Robert, 2016. "Achieving Price Stability by Manipulating the Central Bank's Payment on Reserves," CEPR Discussion Papers 11578, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11578
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    Cited by:

    1. Ricardo Reis, 2019. "Central Banks Going Long," Central Banking, Analysis, and Economic Policies Book Series, in: Álvaro Aguirre & Markus Brunnermeier & Diego Saravia (ed.),Monetary Policy and Financial Stability: Transmission Mechanisms and Policy Implications, edition 1, volume 26, chapter 3, pages 043-081, Central Bank of Chile.
    2. Jean Barthelemy & Eric Mengus, 2017. "Credibility and Monetary Policy," Working Papers hal-01970733, HAL.
    3. Gaballo, Gaetano & Mengus, Eric, 2023. "Myopic fiscal objectives and long-Run monetary efficiency," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 1-17.
    4. Ricardo Reis, 2016. "Can the Central Bank Alleviate Fiscal Burdens?," Discussion Papers 1701, Centre for Macroeconomics (CFM).
    5. repec:spo:wpmain:info:hdl:2441/1lu2rbsv0n8pkqid81q0tfof3f is not listed on IDEAS
    6. Ricardo Reis, 2019. "Central Banks Going Long," Central Banking, Analysis, and Economic Policies Book Series, in: Álvaro Aguirre & Markus Brunnermeier & Diego Saravia (ed.),Monetary Policy and Financial Stability: Transmission Mechanisms and Policy Implications, edition 1, volume 26, chapter 3, pages 043-081, Central Bank of Chile.
    7. Tom D. Holden, 2024. "Robust Real Rate Rules," Econometrica, Econometric Society, vol. 92(5), pages 1521-1551, September.
    8. George J. Bratsiotis, 2021. "Interest on Reserves as a Main Monetary Policy Tool," Economics Discussion Paper Series 2102, Economics, The University of Manchester, revised Feb 2022.
    9. Mengus, Eric & Barthelemy, Jean, 2017. "Monetary Rules, Determinacy and Limited Enforcement," HEC Research Papers Series 1202, HEC Paris, revised 11 May 2019.
    10. 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.
    11. Keshav Dogra, 2024. "Paradoxes and Problems in the Causal Interpretation of Equilibrium Economics," Staff Reports 1093, Federal Reserve Bank of New York.
    12. Laura Castillo-Martinez & Ricardo Reis, 2024. "How do central banks control inflation? A guide for the perplexed," Discussion Papers 2433, Centre for Macroeconomics (CFM).
    13. Magill, Michael & Quinzii, Martine & Rochet, Jean-Charles, 2020. "The safe asset, banking equilibrium, and optimal central bank monetary, prudential and balance-sheet policies," Journal of Monetary Economics, Elsevier, vol. 112(C), pages 113-128.
    14. Jean Barthélemy & Eric Mengus, 2017. "Credibility and Monetary Policy," Working Papers hal-03457527, HAL.
    15. repec:hal:spmain:info:hdl:2441/1lu2rbsv0n8pkqid81q0tfof3f is not listed on IDEAS
    16. 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

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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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