Excess Bank Reserves and Monetary Policy with a Lower-Bound Lending Rate
WORKING PAPER
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The paper posits the existence of a minimum mark-up loan interest rate threshold, which is identified using a long-term bank demand curve for excess reserves.
The theoretical framework allows us to determine whether the unprecedented expansion of bank reserves by the Federal Reserve will engender inflation, deflation, hyperinflation or a deflationary spiral. The final outcome depends on a linear combination of five parameters and two probability regimes. The empirical results tend to support a deflation instead of an inflation regime.