Thinking about the zero bound this way suggests that variable interest on reserves could be utilized routinely and productively as an instrument of monetary policy. The Fed could replace its current operating procedures with a new interest-on-reserves regime. For heuristic purposes, I describe the implementation of the new regime in two steps, although the steps would take place simultaneously in practice. First, the Fed would purchase additional securities in the open market, adding enough reserves to satiate the market and drive the federal funds rate to zero. The Bank of Japan actually implemented this step recently with its zero interest.
