Author information:
Paul De Grauwe https://orcid.org/0000-0001-5225-1301: London School of Economics and Political Science, Professor of Economics. E-mail: p.c.de-grauwe@lse.ac.uk
Yuemei Ji https://orcid.org/0000-0002-6327-7846: University College London, Professor of Economics. E-mail: yuemei.ji@ucl.ac.uk
Abstract:
The major central banks now operate in a regime of abundant bank reserves. As a result, they can only raise the money market rate by increasing the rate of remuneration of bank reserves. This, in turn, leads to large transfers of central banks’ profits to commercial banks that will become unsustainable and renders the transmission of monetary policies less effective. We propose a two-tier system of reserve requirements that would only remunerate the reserves in excess of the minimum required. This would drastically reduce the giveaways to banks, allow the central banks to maintain their current operating procedures and make monetary policies more effective in fighting inflation.
Cite as (APA):
De Grauwe, P., & Ji, Y. (2024). Fighting Inflation without Massive Transfers to Banks. Financial and Economic Review, 23(4), 80–101. https://doi.org/10.33893/FER.23.4.80
Column:
Study
Journal of Economic Literature (JEL) codes:
E42, E52, E58
Keywords:
central banks, inflation, bank reserves, remuneration
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