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Diane Publishing Books
Why are Banks Holding So Many Excess Reserves?
Todd Keister (au); James McAndrews (au)
The quantity of reserves in the U.S. banking system has risen dramatically since Sept. 2008. This pattern may indicate that the Federal Reserveís (FR) liquidity facilities have been ineffective in promoting the flow of credit to firms and households. Others have argued that the high level of reserves will be inflationary. This report explains why banks are currently holding so many reserves. The examples show how the quantity of bank reserves is determined by the size of the FRís policy initiatives and in no way reflects the initiativesí effects on bank lending. A large increase in bank reserves need not be inflationary, because the payment of interest on reserves allows the FR to adjust short-term interest rates independently of the level of reserves. Illus..
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