A Simple General Equilibrium Model of Large Excess Reserves
 
Huberto M. Ennis
Research Department
Federal Reserve Bank of Richmond
 
Working paper 14-14
July 2014

 
Abstract
I study a non-stochastic, perfect foresight, general equilibrium macroeconomic model with a banking system that may hold large quantities of excess reserves when the central bank pays interest on reserves. The banking system also faces a capital constraint that may or may not be binding. If the quantity of reserves is large and bank capital is not scarce, the equilibrium price level is indeterminate. This implies that the real value of excess reserves could take different values while maintaining constant the price level. However, for a large enough level of reserves, the bank capital constraint becomes binding and the price level moves one to one with the quantity of reserves.  

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