Paying interest on reserves would seem to be expensive from the Treasury’s point of view. Interest earnings ordinarily transferred by a central bank as tax revenue to the Treasury would be diverted to pay interest on reserves. Moreover, the payment of interest on reserves would induce banks to enlarge substantially the quantity of reserves demanded, greatly enlarging the interest that a central bank would have to pay. This section addresses the financing of interest on reserves, and argues that the fiscal implications are likely to be more favorable than might be supposed. Implementing an interest-on-reserves regime has two effects on.
