IDEAS home Printed from https://ideas.repec.org/p/fip/fedmep/15-8.html
   My bibliography  Save this paper

Should We Worry About Excess Reserves?

Author

Listed:
  • Christopher Phelan

Abstract

Banks in the United States have the potential to increase liquidity suddenly and significantly?from $12 trillion to $36 trillion in currency and easily accessed deposits?and could thereby cause sudden inflation. This is possible because the nation?s fractional banking system allows banks to convert excess reserves held at the Federal Reserve into bank loans at about a 10-to-1 ratio. Banks might engage in such conversion if they believe other banks are about to do so, in a manner similar to a bank run that generates a self-fulfilling prophecy. {{p}} Policymakers could guard against this inflationary possibility by the Fed selling financial assets it acquired during quantitative easing or by Congress significantly raising reserve requirements.

Suggested Citation

  • Christopher Phelan, 2015. "Should We Worry About Excess Reserves?," Economic Policy Paper 15-8, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmep:15-8
    as

    Download full text from publisher

    File URL: https://minneapolisfed.org/~/media/files/pubs/eppapers/15-8/epp-15-8-should-we-worry-about-excess-reserves.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Bassetto, Marco & Phelan, Christopher, 2015. "Speculative runs on interest rate pegs," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 99-114.
    2. Chari, V.V. & Phelan, Christopher, 2014. "On the social usefulness of fractional reserve banking," Journal of Monetary Economics, Elsevier, vol. 65(C), pages 1-13.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ennis, Huberto M., 2018. "A simple general equilibrium model of large excess reserves," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 50-65.
    2. Christian Wipf, 2020. "Should Banks Create Money?," Diskussionsschriften dp2015, Universitaet Bern, Departement Volkswirtschaft.
    3. Bassetto, Marco & Cui, Wei, 2018. "The fiscal theory of the price level in a world of low interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 5-22.
    4. Marco Bassetto & Wei Cui, 2018. "The Fiscal Theory of the Price Level in an Environment of Low Interest Rates," 2018 Meeting Papers 574, Society for Economic Dynamics.
    5. Fegatelli, Paolo, 2022. "A central bank digital currency in a heterogeneous monetary union: Managing the effects on the bank lending channel," Journal of Macroeconomics, Elsevier, vol. 71(C).
    6. Manuel Amador & Javier Bianchi & Luigi Bocola & Fabrizio Perri, 2020. "Exchange Rate Policies at the Zero Lower Bound," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(4), pages 1605-1645.
    7. Daniel Sanches, 2016. "On The Welfare Properties Of Fractional Reserve Banking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 935-954, August.
    8. Paolo Fegatelli, 2021. "The one trillion euro digital currency: How to issue a digital euro without threatening monetary policy transmission and financial stability?," BCL working papers 155, Central Bank of Luxembourg.
    9. Hugo Rodríguez Mendizábal, 2020. "Narrow Banking with Modern Depository Institutions: Is There a Reason to Panic?," International Journal of Central Banking, International Journal of Central Banking, vol. 16(4), pages 145-197, September.
    10. Zhixiu Yu, 2023. "On the Coexistence of Cryptocurrency and Fiat Money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 147-180, July.
    11. Federico Sturzenegger, 2019. "Macri´s Macro: The meandering road to stability and growth," Working Papers 135, Universidad de San Andres, Departamento de Economia, revised Oct 2019.
    12. Jakab, Zoltan & Kumhof, Michael, 2018. "Banks are not intermediaries of loanable funds — facts, theory and evidence," Bank of England working papers 761, Bank of England, revised 17 Jan 2020.
    13. Heon Lee, 2023. "On the Instability of Fractional Reserve Banking," Papers 2305.14503, arXiv.org, revised Apr 2024.
    14. Daniel Sanches, 2016. "On The Welfare Properties Of Fractional Reserve Banking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(3), pages 935-954, August.
    15. Dirk Niepelt, 2024. "Money and Banking with Reserves and CBDC," Journal of Finance, American Finance Association, vol. 79(4), pages 2505-2552, August.
    16. Samuel Demeulemeester, 2022. "What analytical framework for Sovereign Money? Some insight from the 100% Money literature, and a comment on criticisms," Working Papers hal-03751756, HAL.
    17. Daniel R. Sanches, 2013. "On the welfare properties of fractional reserve banking," Working Papers 13-32, Federal Reserve Bank of Philadelphia.
    18. Jakab, Zoltan & Kumhof, Michael, 2015. "Banks are not intermediaries of loanable funds – and why this matters," Bank of England working papers 529, Bank of England.
    19. Daniel R. Sanches, 2014. "Banking panics and protracted recessions," Working Papers 14-37, Federal Reserve Bank of Philadelphia.
    20. Stephen F. Quinn & William Roberds, 2017. "An Early Experiment with \"Permazero\"," FRB Atlanta Working Paper 2017-5, Federal Reserve Bank of Atlanta.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedmep:15-8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jannelle Ruswick (email available below). General contact details of provider: https://edirc.repec.org/data/cfrbmus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.