Excess Reserves and Monetary Policy Normalization

The federal funds market , excess reserves , and unconventional monetary policy ✯

Following the bankruptcy of Lehman Brothers, interbank borrowing and lending dropped, whereas reserve holdings of depository institutions skyrocketed, as the Fed injected liquidity into the U.S. banking sector. This paper introduces bank liquidity risk and limited market participation into a real business cycle model with ex ante identical financial intermediaries and shows, in an analytically ...

Excess reserves and the New challenges for Monetary Policy

Interest on reserves allows the Federal Reserve to pursue an appropriate monetary policy even with a high level of excess reserves. However, a banking system flush with excess reserves can raise the risk of monetary policy getting behind the curve. In recent months, the level of total reserves held by depository institutions (DIs) in the United States has been consistently above $1 trillion. Of...

Monetary Policy with Interest on Reserves

I analyze monetary policy with interest on reserves and a large balance sheet. I show that conventional theories do not determine inflation in this regime, so I base the analysis on the fiscal theory of the price level. I find that monetary policy can peg the nominal rate, and determine expected inflation. With sticky prices, monetary policy can also affect real interest rates and output, thoug...

The Optimal Conduct of Monetary Policy With Interest on Reserves

Monetary Aggregates and Monetary Policy

This is a special conference for the Federal Reserve Bank of Boston, and for me personally. The role of monetary aggregates in monetary policy was intensely controversial when I joined the staff of the Board of Governors in May 1969. I was immediately asked to join the staff of the newly formed FOMC Committee on the Directive. Governor Sherman Maisel chaired that committee; the other two member...