Monetary Policy with Interest on Reserves

25 Pages Posted: 16 Dec 2012

Date Written: 2010


Since the fall of 2008, the amount of outstanding reserves on the Federal Reserve's balance sheet has increased from about 100 billion dollars to more than 1 trillion dollars. There is some concern that the magnitude of outstanding reserves might affect the ability of the Federal Reserve to conduct monetary policy through an interest rate policy. In this article I argue that the ability of the Federal Reserve to pay interest on reserves, also introduced in the fall of 2008, should lessen this concern. For an appropriately modified baseline model of money, I show that, with the payment of interest on reserves, the interaction of monetary and fiscal policy in the determination of the price level is not affected in a quantitatively meaningful way by the amount of outstanding reserves.

Suggested Citation

Hornstein, Andreas, Monetary Policy with Interest on Reserves (2010). FRB Richmond Economic Quarterly, vol. 96, no. 2, Second Quarter 2010, pp. 153-177. Available at SSRN:

Andreas Hornstein (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8266 (Phone)
804-697-8255 (Fax)

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