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Summer 2016

ISSN 0890-913X

Volume 31, Number 2

Categories: Summer 2016 | Federal Reserve System

The Federal Reserve's Floor System: Immediate Gain for Remote Pain?

Paul D. Mueller, The King's College, Manhattan

Joshua Wojnilower, George Mason University

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TheJournalofPrivateEnterprise31(2),2016,15–40TheFederalReserve’sFloorSystem:ImmediateGainforRemotePain?PaulD.MuellerTheKing’sCollege,ManhattanJoshuaWojnilower∗GeorgeMasonUniversity______________________________________________________AbstractTheFederalReserve’sinterestratepolicywasinsufficient,onitsown,toachievetheFederalReserve’sgoalsduringtherecentfinancialcrisis.AcquiringthelegalauthoritytopayinterestonreservesallowedtheFederalReservetoimplementmonetarypolicyusingafloorsystemandtherebydivorceinterestratepolicyfrombalancesheetpolicy.Althoughthefloorsystementailsimmediatebenefits,suchaseliminatingtheimplicittaxonreservesandreducingthecreditriskassociatedwithdaylightoverdrafts,theremoteeffectsincludepotentiallylargecosts.Morespecifically,theFederalReserve’sbalancesheetpoliciesmayreducelonger-runeconomicgrowthandrisktheinstitution’sindependence.Tomaintainthefloorsystem’spresentbenefits,theFederalReserveshouldthereforecontinuetoimplementinterestratepolicythroughinterestonreserves.Toprotectagainstthefloorsystem’sfuturecosts,theFederalReserveshould,however,restrictitsbalancesheetpolicytoBagehot’sprinciplesforlastresortlending.______________________________________________________JELCodes:E52,E58,G21Keywords:FederalReserve,financialcrisis,floorsystem,interestonreserves,interestrates,monetarypolicy“Noverydeepknowledgeofeconomicsisusuallyneededforgraspingtheimmediateeffectsofameasure;butthetaskofeconomicsistoforetelltheremotereffects,andsotoallowustoavoidsuchactsasattempttoremedyapresentillbysowingtheseedsofamuchgreaterillforthefuture.”—LudwigvonMises([1953]2009,p.14)∗WegratefullyacknowledgecommentsfromArtCarden,DanielJ.Smith,DavidD.VanHoose,LawrenceH.White,afewanonymousreferees,andpanelparticipantsatboththePublicChoiceSocietyandAssociationofPrivateEnterpriseEducation2014AnnualConferences.Allremainingerrorsareourown.

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Metadata [hide]

Title	The Federal Reserve's Floor System: Immediate Gain for Remote Pain?
Authors/Creators:	Paul D. Mueller, The King's College, Manhattan Joshua Wojnilower, George Mason University
Year:	2016
Volume:	31
Number:	2
Pages:	15 - 40
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	Federal Reserve, financial crisis, floor system, interest on reserves, interest rates, monetary policy

Citation:
Mueller, Paul D.; Wojnilower, Joshua / 2016. "The Federal Reserve's Floor System: Immediate Gain for Remote Pain?." The Journal of Private Enterprise, 31(2): 15-40.