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Setting Interest Rates in the Modern Money Era

Wartburg College and the Center for Full Employment and Price Stability Working Paper No. 34

24 Pages Posted: 12 Dec 2010  

Scott T. Fullwiler

Wartburg College; Bard College - The Levy Economics Institute

Date Written: July 1, 2004

Abstract

Financial innovations have reduced banks’ reserve holdings. Some argue the Fed’s ability to set interest rates might be compromised. This concerns arises from a misunderstanding of Fed operations. Regardless of the quantity of reserve balances, the Fed can always set its federal funds rate target. The quantity of reserve balances or the relative size of the Fed’s operations are also unrelated to its influence on interest rates. That banks must settle their customers’ tax liabilities using reserve balances is sufficient for the Fed’s interest rate target to influence other interest rates.

Keywords: monetary operations, monetary policy, demand for central bank liabilities, payments system

JEL Classification: E43, E5

Suggested Citation

Fullwiler, Scott T., Setting Interest Rates in the Modern Money Era (July 1, 2004). Wartburg College and the Center for Full Employment and Price Stability Working Paper No. 34. Available at SSRN: https://ssrn.com/abstract=1723591 or http://dx.doi.org/10.2139/ssrn.1723591

Scott T. Fullwiler (Contact Author)

Wartburg College ( email )

222 Ninth St. NW
Waverly, IA 50677
United States

Bard College - The Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States

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