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Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel

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  • Bratsiotis, George

Abstract

This paper examines the role of precautionary liquidity (reserves) and the interest on reserves as two potential determinants of the deposits channel that can help explain the role of monetary policy, particularly at the near zero-bound. Through the deposits channel either of these two determinants can explain a number of effects including, (i) zero-bound optimal policy rates, (ii) a negative deposit rate spread, but also (iii) determinacy at the lower-zero bound. Similarly, through its effects on the deposits channel the interest on reserves can act as the main tool of monetary policy, that is shown to provide higher welfare gains than a simple Taylor rule. This result is shown to hold at the zero-bound and it is independent of precautionary liquidity, or the fiscal theory of the price level.

Suggested Citation

  • Bratsiotis, George, 2018. "Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel," EconStor Preprints 172770, ZBW - Leibniz Information Centre for Economics, revised 2018.
    • Handle: RePEc:zbw:esprep:172770
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    2. Parantap Basu & Kenji Wada, 2018. "Unconventional Monetary Policy and the Bond Market in Japan: A New-Keynesian Perspective," IMES Discussion Paper Series 18-E-12, Institute for Monetary and Economic Studies, Bank of Japan.

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    Keywords

    Deposits channel; zero-bound monetary policy; excess reserves; credit risk; balance sheet channel; interest on reserves; required reserve ratio; welfare; DSGE models;
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