Woj analyzes Ashwin Parameshwaran's Helicopter Money Is Not Dangerous, All Macroeconomic Policy Is Dangerous in terms of the real interest rate and the real wage, showing why a monetary approach is too blunt an instrument, so that a targeted fiscal approach is needed.
Bubbles and Busts
The Dangers of Misunderstanding "Helicopter Money" and Higher Inflation Targets
Joshua Wojnilower
ReplyDeleteThinking of QE
it's my understanding that a bank can only do 3 things with reserves.
hold it as part of their reserve requirement
lend it to another institution to fulfill their requirement .
use them to purchase U.S treasuries
Reserve can never become part of the banks capital is this correct?
If so what benefit is the bank getting from paid interest on reserve. doesn't the extra interest just become more excess reserves?
Does the interest paid on reserves become bank capital?
What about interest on treasuries as a result of a reverse QE
To your list I would add that reserves can be exchanged for currency (vault cash).
ReplyDeleteAs for the question regarding capital, I'm less sure but I believe that reserves are part of Tier 1 capital (http://www.frbsf.org/education/activities/drecon/2001/0109.html). In that case, interest paid on reserves adds to bank capital by adding extra reserves.
thanks for the reply
ReplyDeleteI ask ,because i remember Mosler saying that reserves never leave the FED. Reserves only existence is at the fed, for the fed's policy fulfillment.
Therefor what use would earning extra reserves, when more reserves aren't required
Reserves balances are bank assets.
ReplyDeleteRight.
ReplyDeleteReserves are part of bank assets.
If they earn extra interest income this will ceteris paribusadd to the bank's net income.
If not distributed as dividends to bank shareholders, said extra interest income will add to Retained Earnings and thus to bank capital.
"Reserves never leave the Fed"
ReplyDeleteM,
Nothing 'leaves' anywhere, this is all a computer based accounting system...
RSP,