Interest on reserves and inflation |
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Authors: | Nissan Liviatan Roni Frish |
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Affiliation: | Bank of Israel, Research Department, Jerusalem 91007, Israel |
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Abstract: | The payment of interest on reserves has been a common practice in inflationary economies. This policy may seem paradoxical since it involves returning part of the seigniorage, generated by the inflation process, with the intention to finance the fiscal deficit. This paper argues that the motivation for this policy can be captured by the discretionary regime, where the policymaker pays interest on reserves because he is concerned with the erosion of real liquidity by inflation, which is in part beyond his control. However, this policy is an unlikely outcome in the commitment regime, where the policymaker is in full control of inflation. |
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Keywords: | E&minus 42 E&minus 52 E&minus 58 |
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