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Economic Brief

Feb. 6, 2019

Richmond Fed Research Explores How Excess Reserves Affect the Relationship Between Money and Prices

The Richmond Fed’s February Economic Brief helps explain how the Federal Reserve dramatically increased the supply of U.S. bank reserves without triggering inflation.

For many years, economists have predicted and observed a tight long-run relationship between the monetary base and the overall price level. So why didn’t the Fed’s balance sheet expansion from 2008 through 2014 cause much inflation? Richmond Fed research uses a macroeconomic model that includes excess bank reserves to help explain this outcome. Importantly, the research also suggests potential limits to the Fed’s ability to expand its balance sheet indefinitely while remaining consistent with its inflation-targeting policy.

The Richmond Fed’s Economic Brief series provides web-exclusive essays on current economic issues and trends. Sign up to receive an email notification when a new essay is posted.


As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District — including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia — to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.

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