Download This PaperThe Effects of High-Powered Money Growth and Reserve Rate Policy in the Model with Money Creation and Interbank Settlement
16 Pages Posted: 20 May 2020
Date Written: April 24, 2020
Abstract
This paper builds a model which allows an equilibrium nominal interest rate on reserve deposit below zero and examines the effect of high-powered money and reserve rate policy. In this model, banks hold cash and reserve deposits for money creation and interbank settlement. If the banks' reserve deposit can be used for both money creation and interbank settlement but cash can be used only for money creation, the lower bound of the nominal interest rate on reserve deposit can be negative. In non-cash equilibirum, in which the lower bound of reserve rate is not binding, we find that the long-run effect of a higher growth of high-powered money on output is negative, but the sign of the effect of a lower reserve rate on output depends on the household's labor disutility parameter and firm's productivity.
Keywords: Money creation, Interbank settlement, Reserve rate policy, High-powered money
JEL Classification: E42, E43, E51, E52
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