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Shawn A Osell
''Comparative Monetary Tools: Open Market Operations and Interest on Reserves''
( 2018, Vol. 38 No.1 )
In 2008, the Federal Reserve implemented several new monetary policy tools. One of these tools included that it began to pay interest on a commercial bank's reserves, which created a channel system. A channel system describes a scenario where the central bank can establish an upper and a lower bound around an announced benchmark interest rate such as the federal funds rate. The penalty rate establishes the upper bound since a bank will not borrow from another commercial commercial bank above this rate. A benefit of paying interest on reserves is that IORs place a lower bound on the federal funds rate. In order to analyze this new policy, this paper utilizes a DSGE model with a banking sector. The banking sector includes excess reserves in its balance sheet that receive interest that can be adjusted by the monetary authority. Exogenous shocks are applied to a deterministic model, where agents anticipate future shocks, and a stochastic model, where agents react to an unexpected shock, in order to analyze the impact on macroeconomic variables. I find that an expansionary IOR policy results in a lower price level compared to applying an expansionary OMO policy.
Keywords: Monetary Policy, Interest on Reserve, Open Market Operations, Federal Resserve
JEL: E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
E1 - General Aggregative Models: General
Manuscript Received : Aug 09 2017 Manuscript Accepted : Feb 27 2018

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