Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel

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This paper examines the role of precautionary liquidity (reserves) and the interest on reserves as two potential determinants of the deposits channel that can help
explain the role of monetary policy, particularly at the near zero-bound. Through
the deposits channel either of these two determinants can explain a number of
effects including, (i) zero-bound optimal policy rates, (ii) a negative deposit rate
spread, but also (iii) determinacy at the lower-zero bound. Similarly, through its
effects on the deposits channel the interest on reserves can act as the main tool
of monetary policy, that is shown to provide higher welfare gains than a simple
Taylor rule. This result is shown to hold at the zero-bound and it is independent
of precautionary liquidity, or the fiscal theory of the price level.
Original languageEnglish
Publication statusPublished - 14 Sep 2018


  • Deposits channel; zero-bound monetary policy; excess reserves; credit risk; balance sheet channel; interest on reserves; required reserve ratio; welfare; DSGE models.


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