The Optimal Conduct of Monetary Policy with Interest on Reserves
Anil K. Kashyap
University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago
Jeremy C. Stein
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
June 29, 2011
Chicago Booth Research Paper No. 11-20
Fama-Miller Working Paper
In a world with interest on reserves, the central bank has two distinct tools that it can use to raise the short-term policy rate: it can either increase the interest it pays on reserve balances, or it can reduce the quantity of reserves in the system. We argue that by using both of these tools together, and by broadening the scope of reserve requirements, the central bank can simultaneously pursue two objectives: i) it can manage the inflation-output tradeoff using a Taylor-type rule; and ii) it can regulate the externalities created by socially excessive short-term debt issuance on the part of financial intermediaries.
Number of Pages in PDF File: 31
Date posted: June 30, 2011 ; Last revised: April 4, 2013
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