Economic Brief

December 2009, No. 09-12

The Effect of Interest on Reserves on Monetary Policy

John R. Walter and Renee Haltom

In October 2008 the Federal Reserve began paying banks interest on the reserves they hold. This action was intended to remove the implicit, distortionary tax that reserve requirements impose on banks, as well as help the Fed maintain the fed funds rate at its target. Going forward, interest on reserves is likely to simplify monetary policy implementation, as well as allow the Fed to pursue separate monetary and credit policies.

Our Research Focus: Inflation and Monetary Policy

Additional Resources

Bernanke, Ben S. "The Federal Reserve's Balance Sheet: An Update." Speech at the Federal Reserve Board Conference on Key Developments in Monetary Policy, Washington, D.C., October 8, 2009.

Ennis, Huberto M., and Todd Keister. "Understanding Monetary Policy Implementation." Federal Reserve Bank of Richmond Economic Quarterly 94, no. 3 (Summer 2008): 235-263.

Ennis, Huberto and John A. Weinberg. "Interest on Reserves and Daylight Credit." Federal Reserve Bank of Richmond Economic Quarterly 93, no. 2 (Spring 2007): 111-142.

Goodfriend, Marvin. "Interest on Reserves and Monetary Policy." Federal Reserve Bank of New York Economic Policy Review 8, no. 1 (May 2002): 13-29.

Keister, Todd and James J. McAndrews. "Why Are Banks Holding So Many Excess Reserves?" Federal Reserve Bank of New York Staff Reports No. 380, July 2009.

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