So again, the accumulation of excess reserves may reflect the perverse impact of central banks paying interest on them... I predict that future economic historians will look back on this change as a major blunder during the current credit tightening, making traditional monetary policy less effective.
Tuesday, December 16, 2008
The Consequences of Paying Interest on Excess Reserves
Jeffrey Hummel has an interesting piece on the Federal Reserve paying interest on excess reserves and its unintended consequences (ht Tyler Cowen):
If this policy turns out to be a major blunder, future economic historians will probably compare it to the one the Fed made in 1936-1937.