Interest on reserves allows the Federal Reserve to pursue an appropriate monetary policy even with a high level of excess reserves. However, a banking system flush with excess reserves can raise the risk of monetary policy getting behind the curve.
Our Research Focus: Inflation and Monetary Policy
Bernanke, Ben S. "The Federal Reserve's Balance Sheet: An Update." Speech to the Federal Reserve Board Conference on Key Developments in Monetary Policy, Washington, D.C., October 8, 2009.
Plosser, Charles I. "Monetary Policy and the Wisdom of Wayne Gretzky." Speech to the 31st Annual Economic Seminar, Rochester, N.Y., December 1, 2009.
Walter, John R. and Renee Courtois. "The Effect of Interest on Reserves on Monetary Policy." Richmond Fed Economic Brief, EB 09-12, December 2009.
Woodward, Susan and Robert Hall. "The Fed Needs to Make a Policy Statement." Financial Crisis and Recession blog, April 13, 2009.