Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60818
Authors: 
Martin, Antoine
McAndrews, James
Skeie, David
Year of Publication: 
2011
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 497
Abstract: 
The amount of reserves held by the US banking system reached $1.5 trillion in April 2011. Some economists argue that such a large quantity of bank reserves could lead to overly expansive bank lending as the economy recovers, regardless of the Federal Reserve's interest rate policy. In contrast, we show that the size of bank reserves has no effect on bank lending in a frictionless model of the current banking system, in which interest is paid on reserves and there are no binding reserve requirements. We also examine the potential for balance-sheet cost frictions to distort banks' lending decisions. We find that large reserve balances do not lead to excessive bank credit and may instead be contractionary.
Subjects: 
Banking
lending
reserves
interest on reserves
Federal Reserve
JEL: 
G21
E42
E43
E51
Document Type: 
Working Paper

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