The Optimal Conduct of Monetary Policy with Interest on Reserves
- (pp. 266-82)
Abstract
In a world with interest on reserves, the central bank has two distinct tools that it can use to raise the short-term policy rate: it can either increase the interest it pays on reserve balances, or it can reduce the quantity of reserves in the system. We argue that by using both of these tools together, and by broadening the scope of reserve requirements, the central bank can simultaneously pursue two objectives: it can manage the inflation-output tradeoff using a Taylor-type rule, and it can regulate the externalities created by socially excessive shortterm debt issuance on the part of financial intermediaries. (JEL E43, E52, E58, G21)Citation
Kashyap, Anil K., and Jeremy C. Stein. 2012. "The Optimal Conduct of Monetary Policy with Interest on Reserves." American Economic Journal: Macroeconomics, 4 (1): 266-82. DOI: 10.1257/mac.4.1.266JEL Classification
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
- E58 Central Banks and Their Policies
- G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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