Tunnels and Reserves in Monetary Policy Implementation

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...

Understanding Monetary Policy Implementation

O ver the last two decades, central banks around the world have adopted a common approach to monetary policy that involves targeting the value of a short-term interest rate. In the United States, for example, the Federal Open Market Committee (FOMC) announces a rate that it wishes to prevail in the federal funds market, where commercial banks lend balances held at the Federal Reserve to each ot...

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...

The Optimal Conduct of Monetary Policy With Interest on Reserves