The Macroeconomic Effects of Interest on Reserves
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.
I would like to thank Michael Belongia, an associate editor, two anonymous referees, and seminar participants at the Federal Reserve Bank of Minneapolis for extremely helpful comments and suggestions. I received no external support for and have no financial interest that relates to the research described in this paper. In addition, the opinions, findings, conclusions, and recommendations expressed herein are my own and do not necessarily reflect those of the Trustees of Boston College or of the National Bureau of Economic Research. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Ireland, Peter N., 2014. "The Macroeconomic Effects Of Interest On Reserves," Macroeconomic Dynamics, Cambridge University Press, vol. 18(06), pages 1271-1312, September. citation courtesy of