"At this point, you're probably thinking: 'Wait. If the Fed charged banks rather than paid them, wouldn't bankers shun excess reserves?' Yes, and that's precisely the point. Excess reserves sitting idle in banks' accounts at the Fed do nothing to boost the economy. We want banks to use the money."
The topic was discussed at the Fed's most recent meeting, as noted by the minutes:
"...most participants thought that a reduction by the Board of Governors in the interest rate paid
on excess reserves could be worth considering at some
stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal
of policy intentions."
Blinder's idea sounds good - but it's based on a misunderstanding. The presence of so many excess reserves is an accounting by-product of the Fed's asset purchases; it tells us virtually nothing about the state of bank lending or whether banks are "us[ing] the money". This identity was nicely described by NY Fed researchers Todd Keister and Jamie McAndrews in a 2009 paper.
Lets hope the current FOMC understands how this works.
Blinder's idea sounds good - but it's based on a misunderstanding. The presence of so many excess reserves is an accounting by-product of the Fed's asset purchases; it tells us virtually nothing about the state of bank lending or whether banks are "us[ing] the money". This identity was nicely described by NY Fed researchers Todd Keister and Jamie McAndrews in a 2009 paper.
Lets hope the current FOMC understands how this works.
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