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THE MACROECONOMIC EFFECTS OF INTEREST ON RESERVES

Published online by Cambridge University Press:  24 May 2013

Peter N. Ireland
Peter N. Ireland*
Affiliation:
Boston College and NBER
*
Address correspondence to: Peter N. Ireland, Department of Economics, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467-3859, USA; e-mail: peter.ireland@bc.edu; URL: https://www2.bc.edu/peter-ireland.
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Abstract

This paper uses a New Keynesian model with banks and deposits to study the macroeconomic effects of policies that pay interest on reserves. Although 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 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 ReservesNew Keynesian Model

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Type
Articles
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Macroeconomic Dynamics , Volume 18 , Issue 6 , September 2014 , pp. 1271 - 1312
Copyright
Copyright © Cambridge University Press 2013 

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