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Why Pay Interest on Excess Reserve Balances?

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Abstract

In a previous post, we described some reasons why it is beneficial to pay interest on required reserve balances. Here we turn to arguments in favor of paying interest on excess reserve balances. Former Federal Reserve Chairman Ben Bernanke and former Vice Chairman Donald Kohn recently discussed many potential benefits of paying interest on excess reserve balances and some common misunderstandings, including that paying interest on reserves restricts bank lending and provides a subsidy to banks. In this post, we focus primarily on benefits related to the efficiency of the payment system and the reduction in the need for the provision of credit by the Fed when operating in a framework of abundant reserves.

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  • Laura Lipscomb & Antoine Martin & Heather Wiggins, 2017. "Why Pay Interest on Excess Reserve Balances?," Liberty Street Economics 20170927, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87214
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    Keywords

    monetary policy; reserve requirements; interest on reserves;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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