A Simple General Equilibrium Model of Large Excess Reserves

42 Pages Posted: 22 Jul 2014

See all articles by Huberto M. Ennis

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: July 16, 2014

Abstract

I study a non-stochastic, perfect foresight, general equilibrium model with a banking system that may hold large excess reserves when the central bank pays interest on reserves. The banking system also faces a capital constraint that may or may not be binding. When the rate of interest on reserves equals the market rate, if the quantity of reserves is large and bank capital is not scarce, the price level is indeterminate. However, for a large enough level of reserves, the bank capital constraint becomes binding and the price level moves one to one with the quantity of reserves.

Suggested Citation

Ennis, Huberto M., A Simple General Equilibrium Model of Large Excess Reserves (July 16, 2014). The Federal Reserve Bank of Richmond Working Paper WP 14-14. Available at SSRN: https://ssrn.com/abstract=2469210 or http://dx.doi.org/10.2139/ssrn.2469210

Huberto M. Ennis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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