Economics Working Paper 18103
Abstract: This paper traces the evolution of the Fed’s balance sheet in the years since the global financial crisis and presents economic reasons why the eventual size of the balance sheet and level of reserve balances should be such that the interest rate is determined by the demand and supply of reserves—in other words, by market forces—rather than by an administered rate under interest on excess reserves (IOER). The Fed would thus be operating as it did in the years before the crisis. The paper also contrasts this size with a system where the supply of reserves remains above the demand, and the interest rate must be administered through IOER.
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