Money and Banking When Reserves Pay Interest

Abstract

The Federal Reserve’s decision in 2008 to begin paying interest on bank reserves, particularly excess reserves (the IOER), has changed the role of the banking system and the determination of the nation’s money supply. Paying interest on bank reserves essentially turned these reserves into investment opportunities for banks, making banks active players in the Federal Reserve's monetary policy actions. In policy study 2001, Thomas Saving explores the current tools used by the Federal Reserve to control the money supply and the new role banks play in determining monetary policy actions.