Fighting Inflation without Massive Transfers to Banks

De Grauwe, Paul and Ji, Yuemei (2024) Fighting Inflation without Massive Transfers to Banks. FINANCIAL AND ECONOMIC REVIEW, 23 (4). pp. 80-101. ISSN 2415-9271

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Abstract

The major central banks now operate in a regime of abundant bank reserves. As a result, they can only raise the money market rate by increasing the rate of remuneration of bank reserves. This, in turn, leads to large transfers of central banks’ profits to commercial banks that will become unsustainable and renders the transmission of monetary policies less effective. We propose a two-tier system of reserve requirements that would only remunerate the reserves in excess of the minimum required. This would drastically reduce the giveaways to banks, allow the central banks to maintain their current operating procedures and make monetary policies more effective in fighting inflation.

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