Interest on Reserves: Implications for Banking and Policymaking

Networks Financial Institute Policy Brief No. 2008-PB-05

28 Pages Posted: 12 May 2008

See all articles by David D. VanHoose

David D. VanHoose

Baylor University - Department of Economics

Date Written: May 2008

Abstract

This policy brief evaluates the banking and policy implications of 2006 Congressional legislation authorizing the Federal Reserve to pay interest on reserves held at Federal Reserve banks beginning in October 2011. This upcoming policy change has received remarkably little attention from the financial media, yet it promises to have effects along several dimensions. Likely to be impacted are total reserves held by depository institutions, the interest sensitivities of these institutions' asset holdings, balances in sweep accounts managed by depository institutions, and depository institutions intraday overdrafts of their reserve accounts at Federal Reserve banks. In addition, the authorization to pay interest on reserves broadens the set of tools of monetary policy available to the Fed. Finally, this policy change strengthens the case for significant reductions in, or possibly elimination of, reserve requirements on U.S. depository institutions.

Keywords: Interest on reserves, intraday overdrafts, sweep accounts

JEL Classification: G28, E51

Suggested Citation

VanHoose, David D., Interest on Reserves: Implications for Banking and Policymaking (May 2008). Networks Financial Institute Policy Brief No. 2008-PB-05, Available at SSRN: https://ssrn.com/abstract=1130906 or http://dx.doi.org/10.2139/ssrn.1130906

David D. VanHoose (Contact Author)

Baylor University - Department of Economics ( email )

P.O. Box 98003
Waco, TX 76798-8003
United States

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