Hostname: page-component-76fb5796d-9pm4c Total loading time: 0 Render date: 2024-04-25T14:44:24.491Z Has data issue: false hasContentIssue false
  • English
  • Français

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.
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Anderson, Richard G., Jones, Barry E., and Nesmith, Travis D. (1997a) Building new monetary services indexes: Concepts, data and methods. Federal Reserve Bank of St. Louis Review 79, 53–82.Google Scholar
Anderson, Richard G., Jones, Barry E., and Nesmith, Travis D. (1997b) Monetary aggregation theory and statistical index numbers. Federal Reserve Bank of St. Louis Review 79, 31–51.Google Scholar
Barnett, William A. (1978) The user cost of money. Economics Letters 1, 145–149.CrossRefGoogle Scholar
Barnett, William A. (1980) Economic monetary aggregates: An application of index number and aggregation theory. Journal of Econometrics 14, 11–48.CrossRefGoogle Scholar
Barth, Marvin J. III and Ramey, Valerie A. (2001) The cost channel of monetary transmission. NBER Macroeconomics Annual 16, 199–240.Google Scholar
Bech, Morten L. and Klee, Elizabeth (2011) The mechanics of a graceful exit: Interest on reserves and segmentation in the federal funds market. Journal of Monetary Economics 58, 415–431.CrossRefGoogle Scholar
Belongia, Michael T. and Ireland, Peter N. (2006) The own-price of money and the channels of monetary transmission. Journal of Money, Credit and Banking 38, 429–445.Google Scholar
Belongia, Michael T. and Ireland, Peter N. (2012) The Barnett Critique after Three Decades: A New Keynesian Analysis. Working paper 17885. Cambridge, MA: National Bureau of Economic Research.CrossRefGoogle Scholar
Berentsen, Aleksander and Cyril Monnet (2008) Monetary policy in a channel system. Journal of Monetary Economics 55, 1067–1080.CrossRefGoogle Scholar
Bernanke, Ben S. (2006) Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective. Speech at the Fourth ECB Central Banking Conference, Frankfurt, Germany, 10 November.Google Scholar
Blanchard, Olivier Jean and Kahn, Charles M. (1980) The solution of linear difference models under rational expecations. Econometrica 48, 1305–1311.CrossRefGoogle Scholar
Bullard, James and Mitra, Kaushik (2007) Determinacy, learnability, and monetary policy inertia. Journal of Money, Credit and Banking 39, 1177–1212.Google Scholar
Calvo, Guillermo A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12, 383–398.Google Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 1–45.Google Scholar
Cooley, Thomas F. and Hansen, Gary D. (1989) The inflation tax in a real business cycle model. American Economic Review 79, 733–748.Google Scholar
Cysne, Rubens Penha and Turchick, David (in press) An ordering of measures of the welfare cost of inflation in economies with interest-bearing deposits. Macroeconomic Dynamics.Google Scholar
Ennis, Huberto M. and Weinberg, John A. (2007) Interest on reserves and daylight credit. Federal Reserve Bank of Richmond Economic Quarterly 93, 111–142.Google Scholar
Federal Reserve Board (2008) Board Announces It Will Begin to Pay Interest on Depository Institutions’ Required and Excess Reserve Balances. Press release, Washington, DC, 6 October.Google Scholar
Gali, Jordi (2008) Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework. Princeton, NJ: Princeton University Press.Google Scholar
Goodfriend, Marvin (2002) Interest on reserves and monetary policy. Federal Reserve Bank of New York Economic Policy Review 8, 77–84.Google Scholar
Goodfriend, Marvin (2011) Central banking in the credit turmoil: An assessment of Federal Reserve practice. Journal of Monetary Economics 58, 1–12.Google Scholar
Hornstein, Andreas (2010) Monetary policy with interest on reserves. Federal Reserve Bank of Richmond Economic Quarterly 96, 153–177.Google Scholar
Ireland, Peter N. (2000) Interest rates, inflation, and Federal Reserve policy since 1980. Journal of Money, Credit and Banking 32, 417–434.CrossRefGoogle Scholar
Ireland, Peter N. (2004a) Money's role in the monetary business cycle. Journal of Money, Credit and Banking 36, 969–983.Google Scholar
Ireland, Peter N. (2004b) Technology shocks in the New Keynesian model. Review of Economics and Statistics 86, 923–936.Google Scholar
Ireland, Peter N. (2008) The monetary transmission mechanism. In Blume, Lawrence and Durlauf, Steven (eds.), The New Palgrave Dictionary of Economics, vol. 5, pp. 721–725. Hampshire, UK: Palgrave Macmilllan.Google Scholar
Jones, Barry, Asaftei, Gabriel, and Wang, Lian (2004) Welfare cost of inflation in a general equilibrium model with currency and interest-bearing deposits. Macroeconomic Dynamics 8, 493–517.Google Scholar
Karni, Edi (1973) The transactions demand for cash: Incorporation of the value of time into the inventory approach. Journal of Political Economy 81, 1216–1225.CrossRefGoogle Scholar
Kashyap, Anil K. and Stein, Jeremy C. (2012). The optimal conduct of monetary policy with interest on reserves. American Economic Journal: Macroeconomics 4, 266–282.Google Scholar
Keister, Todd, Martin, Antoine, and McAndrews, James (2008) Divorcing money from monetary policy. Federal Reserve Bank of New York Economic Policy Review 14, 41–56.Google Scholar
Klein, Paul (2000) Using the generalized Schur form to solve a multivariate linear rational expectations model. Journal of Economic Dynamics and Control 24, 1405–1423.Google Scholar
Leeper, Eric M. (1991) Equilibria under “active“ and “passive“ monetary and fiscal policies. Journal of Monetary Economics 27, 129–147.Google Scholar
Plosser, Charles I. (2010) Credible Commitments and Monetary Policy after the Crisis. Speech at the Swiss National Bank Monetary Policy Conference, Zurich, Switzerland, 24 September.Google Scholar
Poole, William (1970) Optimal choice of monetary policy instruments in a simple stochastic macro model. Quarterly Journal of Economics 84, 197–216.CrossRefGoogle Scholar
Rabanal, Paul (2007) Does inflation increase after a monetary policy tightening? Answers based on an estimated DSGE model. Journal of Economic Dynamics and Control 31, 906–937.Google Scholar
Ravenna, Federico and Walsh, Carl E. (2006) Optimal monetary policy with the cost channel. Journal of Monetary Economics 53, 199–216.Google Scholar
Rotemberg, Julio J. (1982) Sticky prices in the United States. Journal of Political Economy 90, 1187–1211.CrossRefGoogle Scholar
Sargent, Thomas and Wallace, Neil (1985) Interest on reserves. Journal of Monetary Economics 15, 279–290.Google Scholar
Smith, Bruce D. (1991) Interest on reserves and sunspot equilibria: Friedman's proposal reconsidered. Review of Economic Studies 58, 93–105.CrossRefGoogle Scholar
Surico, Paolo (2008) The cost channel of monetary policy and indeterminacy. Macroeconomic Dynamics 12, 724–735.Google Scholar
Taylor, John B. (1993) Discretion versus policy rules in practice. Carnegie–Rochester Conference Series on Public Policy 39, 195–214.Google Scholar
Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar