Working Paper

A TRACTABLE MODEL OF THE DEMAND FOR RESERVES UNDER NONLINEAR REMUNERATION SCHEMES

Abstract: We propose a tractable model of the demand for reserves under nonlinear remuneration schemes that can encompass quota systems and voluntary reserve target frameworks, among other possibilities. We show how such remuneration schemes have several favorable properties regarding interest-rate control by the central bank. In particular, wider tolerance bands can reduce rate volatility due to variations in the supply of reserves, both large and small, although they may curtail trading in the interbank market.

Keywords: Bank reserves; monetary policy implementation.;

JEL Classification: E41; E42;

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2016-12-12

Number: 16-35

Pages: 27 pages