Interest on reserves

Thomas Sargent, Neil Wallace

    Research output: Contribution to journalArticlepeer-review


    In a general equilibrium setting, we study versions of the proposal to pay interest on reserves at the market rate. We argue that the proposal makes the demand for total reserves indeterminate, whether interest is paid on total reserves or on required reserves only. One consequence is that tax financing of the proposal gives rise to a continuum of equilibria, equilibria which differ in real returns and consumption allocations. Another consequence is that financing through earnings on the central bank's portfolio either gives rise to an equilibrium with a zero nominal interest rate or to no equilibrium.

    Original languageEnglish (US)
    Pages (from-to)279-290
    Number of pages12
    JournalJournal of Monetary Economics
    Issue number3
    StatePublished - May 1985

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics


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