Excess Reserves, Unconventional Monetary Policy and the Consequences for Fiscal Stimulus Packages

Abstract

Employing huge economic stimulus packages was a common response of many policy leaders during the past financial crisis. In Germany for instance, the government enacted two fiscal packages with an overall volume of approximately 80 billion Euros. On the other hand, the distortions in the banking sector led to an increase in the interest paid for loans, which called for central bank interventions. The resulting increase in the money supply was accompanied by an increased demand for government bonds as well as a sharp rise of the excess reserves. This paper introduces a DSGE framework to analyze the consequences of the enormous amount of excess reserves for a successful fiscal stimulus package. Our results suggest that these reserves may increase the fiscal multiplier in a non-negligible fashion.

Keywords: excess reserves, fiscal policy, ECB, deposit rate

JEL Classification: E12, E42, E44, E51, E52, E63