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Federal Reserve Bank of Cleveland
Economic Commentary
Monetary policy in a world with interest on reserves
Charles T. Carlstrom
Timothy S. Fuerst

Banks have long been required to hold reserves equal to a percentage of their net transactions accounts (checkable deposits, for example), but until recently, they earned no interest on those reserves. The Fed now pays interest on required and excess reserve balances, having been granted the authority by Congress and putting the policy into place ahead of schedule so that it could be used to help address the financial crisis. The policy will be particularly useful when it is time to start tightening policy and unwind the Fed’s balance sheet.

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Charles T. Carlstrom & Timothy S. Fuerst, "Monetary policy in a world with interest on reserves" , Federal Reserve Bank of Cleveland, Economic Commentary, issue Jun, 2010.
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Keywords: Monetary policy ; Bank reserves ; Federal funds rate
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