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Interest on Reserves as a Main Monetary Policy Tool

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  • George J. Bratsiotis

Abstract

This paper examines the potential role of the interest on reserves as a main monetary policy tool, in a model of financial intermediation with financial and nominal frictions calibrated to US data (1985-2018). The interest on reserves is shown to affect financial spreads and real economic activity, through its effect on the banking system's reserves (balance sheet channel) and the price of safe liquid assets (intertemporal Euler equation channel). It is shown to provide, (i) determinacy when the interest rate is pegged, independently of the size of reserves, bank capital restrictions, or fiscal policy; (ii) similar welfare improvements to an optimal Taylor rule; (iii) an alternative main monetary policy tool for driving the economy out of recessions when the conventional interest rate is trapped at the zero-lower-bound.

Suggested Citation

  • 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.
    • Handle: RePEc:man:sespap:2102
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    File URL: https://hummedia.manchester.ac.uk/schools/soss/economics/discussionpapers/EDP-2102.pdf
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    References listed on IDEAS

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    3. Williamson, Stephen D., 2019. "Interest on reserves, interbank lending, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 14-30.
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    Cited by:

    1. Bratsiotis, George J. & Theodoridis, Konstantinos, 2022. "Precautionary liquidity shocks, excess reserves and business cycles," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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