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Interest on Reserves and the Flexibility of Monetary Policy in the Euro Area
Author(s) -
Neyer Ulrike
Publication year - 2009
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2009.01570.x
Subject(s) - economics , monetary policy , flexibility (engineering) , reserve requirement , excess reserves , remuneration , monetary economics , forward guidance , interest rate , order (exchange) , bank reserves , central bank , credit channel , inflation targeting , finance , management
This paper shows that remunerating required reserves can increase the flexibility of monetary policy. The remuneration at the current policy rate implies constant net marginal interest costs of holding required reserves. This allows the central bank to change the policy rate also within a reserve maintenance period without inducing a problematic reserve shifting on behalf of the banks. In the euro area, required reserves are remunerated at an average rate. Therefore, the way in which reserves are remunerated has to be changed in order to make use of the advantage of a higher flexibility of monetary policy.