The interest-on-reserves regime has four attractive features. First, the regime would make full use of two monetary policy instruments—open market operations and interest on reserves—to enable a central bank to simultaneously pursue interest rate policy and an independent objective for aggregate bank reserves. That would potentially improve on the Fed’s current operating procedures that obligate bank reserves to support interest rate policy. Bank reserves could be varied to offset shocks to the private supply of broad liquidity in financial markets in the interest-on-reserves regime, while interest rate policy could be used to stabilize the overall macroeconomy. Second, the interest-on-reserves regime.
