Template-Type: ReDIF-Article 1.0

Author-Name: Paul De Grauwe
Author-Workplace-Name: London School of Economics and Political Science
Author-Email: p.c.de-grauwe@lse.ac.uk
Author-Person: pde1077

Author-Name: Yuemei Ji
Author-Workplace-Name: University College London
Author-Email: yuemei.ji@ucl.ac.uk
Author-Person: pji81

Title: Fighting Inflation without Massive Transfers to Banks

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.

Classification-JEL: E42, E52, E58
Keywords: central banks, inflation, bank reserves, remuneration
Pages: 80-101
Volume: 23
Issue: 4
Year: 2024
File-URL: https://hitelintezetiszemle.mnb.hu/sw/static/file/fer-23-4-st5-de-grauwe-ji.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:finrev:v:23:y:2024:i:4:p:80-101