The Problem of Excess Reserves, Then and Now
Levy Economics Institute of Bard College Working Paper No. 763
20 Pages Posted: 11 May 2013
Date Written: May 10, 2013
Abstract
This working paper looks at excess reserves in historical context and analyzes whether they constitute a monetary policy problem for the Federal Reserve System (the “Fed”) or a potentially inflationary problem for the rest of us. Generally, this analysis shows that both absolute and relative sizes of excess reserves are a big problem for the Fed as well as the general public because of their inflationary potential. However, like all contingencies, the timing and extent of the damage that reserve-driven inflation might cause are uncertain. It is even possible today to find articles in both scholarly circles and the popular press arguing either that the inflationary blowoff might never happen or that an increasing tendency toward prolonged deflation is the more probable outcome.
Keywords: Excess Reserves, Federal Reserve, Fed, European Central Bank, ECB, Quantitative Easing, Monetary Stimulus
JEL Classification: E51, E52, E58
Suggested Citation: Suggested Citation