Creator: Sargent, Thomas J. and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 211 Abstract:
In a general equilibrium setting, we study versions of the proposal to pay interest on reserves at the market rate. We argue that the proposal makes the demand for total reserves indeterminate whether interest is paid on total reserves or on required reserves only. One consequence is that tax financing of the proposal gives rise to a continuum of equilibria, equilibria which differ in real returns and consumption allocations. Another consequence is that an attempt to finance the proposal through earnings on the central bank’s portfolio either gives rise to an equilibrium with a zero nominal interest rate or fails to give rise to an equilibrium.
Keyword: Reserves, General equilibrium models, and Interest rates Subject (JEL): E43 - Interest Rates: Determination, Term Structure, and Effects and D58 - Computable and Other Applied General Equilibrium Models
Creator: Sargent, Thomas J. and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 214 Keyword: Quantity theory of money, Seignorage, Commodities, Symmetallism, Private issue inside money, and Bimetallism Subject (JEL): E52 - Monetary Policy and E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems