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American Economic Journal: Macroeconomics: Vol. 4 No. 1 (January 2012)

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The Optimal Conduct of Monetary Policy with Interest on Reserves

Article 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.4.1.266

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)

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Authors

Kashyap, Anil K. (U Chicago)
Stein, Jeremy C. (Harvard U)

JEL Classifications

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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American Economic Journal: Macroeconomics


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