IDEAS home Printed from https://ideas.repec.org/p/rdg/emxxdp/em-dp2006-39.html
   My bibliography  Save this paper

The impact of paying interest on reserves in the presence of government deficit financing

Author

Listed:
  • Mark G. Guzman

    (Department of Eocnomics, University of Reading)

Abstract

This paper re-examines the impact that paying interest on reserves has on price level indeterminacy, volatility, and economic well-being. Unlike the previous literature, this model includes an after-tax deficit that must be financed by assets (bonds and reserves) whose returns are linked. I show the number of steady state equilibria is equal to, or greater than, the number arising in the nointerest economy. Consequently, the level of indeterminacy is equal to, or greater than, in the no-interest economy. When the level of indeterminacy is the same, then economic volatility is reduced by paying interest. However, greater indeterminacy in the interest economy, results in greater volatility. Paying interest on reserves can enhance welfare and, under certain conditions, unpleasant monetarist arithmetic may also obtain.

Suggested Citation

  • Mark G. Guzman, 2006. "The impact of paying interest on reserves in the presence of government deficit financing," Economics Discussion Papers em-dp2006-39, Department of Economics, University of Reading.
    • Handle: RePEc:rdg:emxxdp:em-dp2006-39
    as

    Download full text from publisher

    File URL: http://www.reading.ac.uk/nmsruntime/saveasdialog.asp?lID=13013&sID=59484
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Neil Wallace, 1984. "Some of the choices for monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 8(Win).
    2. Marvin Goodfriend, 2002. "Interest on reserves and monetary policy," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 77-84.
    3. Sargent, Thomas & Wallace, Neil, 1985. "Interest on reserves," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 279-290, May.
    4. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
    5. Bruce D. Smith, 1991. "Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 93-105.
    6. Richard G. Anderson & Robert H. Rasche, 2001. "Retail sweep programs and bank reserves, 1994-1999," Review, Federal Reserve Bank of St. Louis, vol. 83(Jan), pages 51-72.
    7. Lacker, Jeffrey M., 1997. "Clearing, settlement and monetary policy," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 347-381, October.
    8. Bruce Smith, 1984. "Money and inflation in colonial Massachusetts," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 8(Win).
    9. Laurence H. Meyer, 2001. "Statement to Congress, March 13, 2001 (payment of interest on reserves )," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue May, pages 301-305.
    10. Donald L. Kohn, 2004. "Regulatory reform proposals: testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, June 22, 2004," Speech 52, Board of Governors of the Federal Reserve System (U.S.).
    11. Bruce Smith & J. Bhattacharya & Mark Guzman, 1998. "Some Even More Unpleasant Monetarist Arithmetic," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 596-623, August.
    12. Robert E. Hall, 2005. "Controlling the Price Level," American Journal of Economics and Sociology, Wiley Blackwell, vol. 64(1), pages 93-112, January.
    13. Mark Toma, 1999. "A Positive Model of Reserve Requirements and Interest on Reserves: A Clearinghouse Interpretation of the Federal Reserve System," Southern Economic Journal, John Wiley & Sons, vol. 66(1), pages 101-116, July.
    14. Charles A. E. Goodhart, 2000. "Can Central Banking Survive the IT Revolution?," International Finance, Wiley Blackwell, vol. 3(2), pages 189-209, July.
    15. Scott Freeman & Joseph H. Haslag, 1996. "On the optimality of interest-bearing reserves in economies of overlapping generations (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(3), pages 557-565.
    16. Dwyer, Gerald Jr. & Saving, Thomas R., 1986. "Government revenue from money creation with government and private money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 239-249, March.
    17. Marco Espinosa & Steven Russell, 1998. "Can a Policy of Higher Inflation Reduce Real Interests in the Long Run?," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 92-103, February.
    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. repec:rdg:wpaper:em-dp2006-39 is not listed on IDEAS
    2. Chadha, Jagjit S. & Corrado, Luisa, 2012. "Macro-prudential policy on liquidity: What does a DSGE model tell us?," Journal of Economics and Business, Elsevier, vol. 64(1), pages 37-62.
    3. Marco A. Espinosa-Vega & Steven Russell, 1998. "A public finance analysis of multiple reserve requirements," FRB Atlanta Working Paper 98-1, Federal Reserve Bank of Atlanta.
    4. Marco A. Espinosa-Vega & Steven Russell, 1997. "History and theory of the NAIRU: a critical review," Economic Review, Federal Reserve Bank of Atlanta, vol. 82(Q 2), pages 4-25.
    5. Marco A. Espinosa-Vega & Steven Russell, 2001. "Stability of steady states in a model of pleasant monetarist arithmetic," FRB Atlanta Working Paper 2001-20, Federal Reserve Bank of Atlanta.
    6. Marvin Goodfriend, 2002. "Interest on reserves and monetary policy," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 77-84.
    7. Brent Hueth & Maro Ibarburu & James Kliebenstein, 2005. "Business Organization and Coordination in Marketing Specialty Hogs: A Comparative Analysis of Two Firms from Iowa," Center for Agricultural and Rural Development (CARD) Publications 05-wp415, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    8. Marco A. Espinosa-Vega & Steven Russell, 1998. "The long-run real effects of monetary policy: Keynesian predictions from a neoclassical model," FRB Atlanta Working Paper 98-6, Federal Reserve Bank of Atlanta.
    9. Ennis, Huberto M., 2018. "A simple general equilibrium model of large excess reserves," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 50-65.
    10. Paal, Beatrix, 2001. "Dynamic Consequences of Stabilization Policies Based on a Return to a Gold Standard," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 143-186, July.
    11. Cutsinger, Bryan P. & Luther, William J., 2022. "Seigniorage payments and the Federal Reserve’s new operating regime," Economics Letters, Elsevier, vol. 220(C).
    12. Bhattacharya, Joydeep & Haslag, Joseph & Russell, Steven, 2005. "The role of money in two alternative models: When is the Friedman rule optimal, and why?," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1401-1433, November.
    13. Matsuoka, Tarishi, 2022. "Asset prices and standing facilities in a monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 135(C).
    14. Barnett, Richard C., 2005. "Coordinating macroeconomic policy in a simple AK growth model," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 621-647, December.
    15. Cochrane, John H., 2014. "Monetary policy with interest on reserves," Journal of Economic Dynamics and Control, Elsevier, vol. 49(C), pages 74-108.
    16. James B. Bullard & Steven Russell, 1998. "Monetary steady states in a low real interest rate economy," Working Papers 1994-012, Federal Reserve Bank of St. Louis.
    17. Maxim Nikitin & Steven Russell, 2006. "Monetary policy arithmetic: reconciling theory with evidence," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 39(1), pages 348-374, February.
    18. Liviatan, Nissan & Frish, Roni, 2006. "Interest on reserves and inflation," Journal of Development Economics, Elsevier, vol. 80(1), pages 269-274, June.
    19. Joe Haslag & Joydeep Bhattacharya & Steven Russell, 2003. "Understanding the Roles of Money, or When is the Friedman Rule Optimal, and Why?," Working Papers 0301, Department of Economics, University of Missouri.
    20. Buiter, Willem H., 2006. "The elusive welfare economics of price stability as a monetary policy objective: why New Keynesian central bankers should validate core inflation," Working Paper Series 609, European Central Bank.
    21. Preston J. Miller & William Roberds, 1989. "How little we know about budget policy effects," FRB Atlanta Working Paper 89-4, Federal Reserve Bank of Atlanta.

    More about this item

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

    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:rdg:emxxdp:em-dp2006-39. 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: Alexander Mihailov (email available below). General contact details of provider: https://edirc.repec.org/data/derdguk.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.