Open AccessInterest on reserves, helicopter money and new monetary policy
Author(s) -
Duong Ngotran
Publication year - 2021
Publication title -
plos one
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.99
H-Index - 332
ISSN - 1932-6203
DOI - 10.1371/journal.pone.0253956
Subject(s) - monetary policy , monetary base , economics , interest rate , monetary economics , inflation targeting , money supply , excess reserves , taylor rule , bank reserves , forward guidance , inflation (cosmology) , deflation , bank rate , currency , open market operation , monetary reform , quantitative easing , central bank , credit channel , reserve requirement , physics , theoretical physics
We build a nonlinear dynamic model with currency, demand deposits and bank reserves. Monetary base is controlled by central bank, while money supply is determined by the interactions between central bank, commercial banks and public. In economic crises when banks cut loans, monetary policy following a Taylor rule is not efficient. Negative interest on reserves or forward guidance is effective, but deflation is still likely to be persistent. If central bank simultaneously targets both interest rate and money supply by a Taylor rule and a Friedman’s k-percent rule, inflation and output are stabilized. An interest rate rule policy is just a subset of a more general monetary policy framework in which central bank can move interest rate and money supply in every direction.