Working Paper: NBER ID: w18409
Authors: Peter N. Ireland
Abstract: This paper uses a New Keynesian model with banks and deposits to study the macroeconomic effects of policies that pay interest on reserves. While their effects on output and inflation are small, these policies require major adjustments in the way that the monetary authority manages the supply of reserves, as liquidity effects vanish in the short run. In the long run, however, the additional degree of freedom the monetary authority acquires by paying interest on reserves is best described as affecting the real quantity of reserves: policy actions that change prices must still change the nominal quantity of reserves proportionally.
Keywords: Interest on Reserves; Monetary Policy; New Keynesian Model
JEL Codes: E31; E32; E51; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Policies paying interest on reserves (E43) | Changes in the way the central bank manages the supply of reserves (E52) |
| Policies paying interest on reserves (E43) | Real quantity of reserves demanded by banks (E51) |
| Adjustments to the interest rate paid on reserves (E43) | Real quantity of reserves demanded (E41) |
| Ability to pay interest on reserves (E49) | Targeting both nominal interest rate and real quantity of reserves simultaneously (E52) |
| Long-run changes in aggregate price level (E30) | Proportional changes in nominal supply of reserves (E52) |