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Interest on reserves, interbank lending, and monetary policy

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  • Williamson, Stephen D.
Abstract
A two-sector general equilibrium banking model is constructed to study the functioning of a floor system of central bank intervention. Only retail banks can hold reserves, and these banks are subject to a capital requirement, creating “balance sheet costs” of holding reserves. An increase in the interest rate on reserves has different qualitative effects from a reduction in the central bank’s balance sheet. Increases in the central bank’s balance sheet can have redistributive effects, and can reduce welfare. A reverse repo facility at the central bank puts a floor under the interbank interest rate, and is always welfare improving.

Suggested Citation

  • Williamson, Stephen D., 2019. "Interest on reserves, interbank lending, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 14-30.
    • Handle: RePEc:eee:moneco:v:101:y:2019:i:c:p:14-30
    DOI: 10.1016/j.jmoneco.2018.07.005
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    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Balance Sheet Blues
      by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2017-02-14 06:04:00
    2. Low Real Interest Rates and Monetary Policy
      by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2017-03-30 02:41:00

    Citations

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    Cited by:

    1. Neyer, Ulrike & Stempel, Daniel & Horst, Maximilian, 2022. "Asymmetric Macroeconomic Effects of QE and Excess Reserves in a Monetary Union," VfS Annual Conference 2022 (Basel): Big Data in Economics 264074, Verein für Socialpolitik / German Economic Association.
    2. Marcelo Rezende & Mary-Frances Styczynski & Cindy M. Vojtech, 2016. "The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations," Finance and Economics Discussion Series 2016-090, Board of Governors of the Federal Reserve System (U.S.).
    3. Horst Maximilian & Neyer Ulrike, 2019. "The Impact of Quantitative Easing on Bank Loan Supply and Monetary Policy Implementation in the Euro Area," Review of Economics, De Gruyter, vol. 70(3), pages 229-265, December.
    4. Javier Bianchi & Saki Bigio, 2022. "Banks, Liquidity Management, and Monetary Policy," Econometrica, Econometric Society, vol. 90(1), pages 391-454, January.
    5. George J. Bratsiotis, 2021. "Interest on Reserves as a Main Monetary Policy Tool," Economics Discussion Paper Series 2102, Economics, The University of Manchester, revised Feb 2022.
    6. Gara Afonso & Marco Cipriani & Adam Copeland & Anna Kovner & Gabriele La Spada & Antoine Martin, 2021. "The Market Events of Mid-September 2019," Economic Policy Review, Federal Reserve Bank of New York, vol. 27(2), pages 1-26, August.
    7. Horst, Maximilian & Neyer, Ulrike, 2019. "The impact of quantitative easing on bank loan supply and monetary policy implementation in the euro area," DICE Discussion Papers 325, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    8. Rezende, Marcelo & Styczynski, Mary-Frances & Vojtech, Cindy M., 2021. "The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations," Journal of Financial Intermediation, Elsevier, vol. 46(C).
    9. Berentsen, Aleksander & Kraenzlin, Sébastien & Müller, Benjamin, 2018. "Exit strategies for monetary policy," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 20-40.
    10. Toni Gravelle & Ron Morrow & Jonathan Witmer, 2023. "Reviewing Canada’s Monetary Policy Implementation System: Does the Evolving Environment Support Maintaining a Floor System?," Discussion Papers 2023-10, Bank of Canada.
    11. Stephen Williamson, 2022. "Central Bank Digital Currency: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 130(11), pages 2829-2861.
    12. Angelo Ranaldo & Benedikt Ballensiefen & Hannah Winterberg, 2020. "Monetary policy disconnect," Working Papers on Finance 2003, University of St. Gallen, School of Finance.
    13. Giuseppe Ferrero & Michele Loberto & Marcello Miccoli, 2021. "The assets’ pledgeability channel of unconventional monetary policy," Economic Inquiry, Western Economic Association International, vol. 59(4), pages 1547-1568, October.
    14. Gries, Thomas & Mitschke, Alexandra, 2019. "Systemic instability of the interbank credit market: A contribution to a resilient financial system," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203582, Verein für Socialpolitik / German Economic Association.
    15. Horst, Maximilian & Neyer, Ulrike & Stempel, Daniel, 2020. "Asymmetric macroeconomic effects of QE-induced increases in excess reserves in a monetary union," DICE Discussion Papers 346, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    16. Hu, Tai-Wei, 2021. "Optimal monetary policy with interest on reserves and capital over-accumulation," Journal of Economic Theory, Elsevier, vol. 196(C).
    17. Hogan, Thomas L., 2021. "Bank lending and interest on excess reserves: An empirical investigation," Journal of Macroeconomics, Elsevier, vol. 69(C).
    18. Fatih Tuluk, 2021. "Collateral Misrepresentation, External Auditing, and Optimal Supervisory Policy," Open Economies Review, Springer, vol. 32(5), pages 975-1016, November.
    19. Zijian Wang, 2023. "Money Laundering and the Privacy Design of Central Bank Digital Currency," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 604-632, December.
    20. Williamson, Stephen D., 2022. "Central bank digital currency and flight to safety," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    21. Begoña Domínguez & Pedro Gomis‐Porqueras, 2023. "Normalizing the Central Bank's Balance Sheet: Implications for Inflation and Debt Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(4), pages 945-974, June.
    22. Changhyun Lee, 2024. "The outside option channel of central bank asset purchase programs: A tale of two crises," Working Papers 363, University of California, Davis, Department of Economics.
    23. Philipp Roderweis & Jamel Saadaoui & Francisco Serranito, 2023. "The Unintended Consequences of ECB’s Asset Purchases. How Excess Reserves Shape Bank Lending," Working Papers of BETA 2023-34, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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    More about this item

    Keywords

    Monetary policy; Floor system; Channel system; Interest on reserves;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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