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A Two Period Deterministic Banking Model with Interest on Reserve Balances

Shawn A. Osell

Abstract



In order to compare the Federal Reserve`s interest on reserve monetary policy tool with open market operations, this monograph develops a two-sector equilibrium model with interest on reserves in the banking sector. It also constructs structural vector autoregression models with empirical data including interest on reserves. The objective of this paper is to analyze the monetary policy transmission effects of the Federal Reserve`s interest on reserve policy. Impulse response functions are applied to both the theoretical and empirical models. The estimated impulse response functions are then compared to the theoretical model`s impulse response functions in order to see how well the model fits the data. This paper`s model finds that both monetary policy tools have the same effect on macroeconomic
aggregated variables.



Keywords


monetary policy transmission, interest on reserve balances, quantitative easing.

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