The Macroeconomic Effects of Interest on Reserves

58 Pages Posted: 22 Sep 2012 Last revised: 21 Apr 2023

See all articles by Peter N. Ireland

Peter N. Ireland

Boston College - Department of Economics

Date Written: September 2012

Abstract

This paper uses a New Keynesian model with banks and deposits to study the macroeconomic effects of policies that pay interest on reserves. While their effects on output and inflation are small, these policies require major adjustments in the way that the monetary authority manages the supply of reserves, as liquidity effects vanish in the short run. In the long run, however, the additional degree of freedom the monetary authority acquires by paying interest on reserves is best described as affecting the real quantity of reserves: policy actions that change prices must still change the nominal quantity of reserves proportionally.

Suggested Citation

Ireland, Peter N., The Macroeconomic Effects of Interest on Reserves (September 2012). NBER Working Paper No. w18409, Available at SSRN: https://ssrn.com/abstract=2150540

Peter N. Ireland (Contact Author)

Boston College - Department of Economics ( email )

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