Ariyathugun, Triwit, 2020. “Interest on Excess Reserves Policy and Asset Prices”, mimeo.

Triwit Ariyathugun | ASB Faculty | Research Paper

Discipline: Economics & Finance

Since 2008, the Federal Reserve System began paying interest on reserves balances held by financial institutions. My work examines the effects of this monetary policy on asset prices and macroeconomic outcomes. To do so, I develop a dynamic heterogeneous-agent asset pricing model in which banks take leverage by borrowing from households. Banks have a choice of depositing reserves with the government. The government collects taxes from households to pay the interest on reserves. This policy reduces banks’ risk-taking, interpretable as less risky lending made to the real economy. Households absorb the bankers’ risk. Banks’ net worth becomes less volatile. The risky loan commands a higher risk premium. The cumulative return process on risky loan faces both higher mean and higher volatility. The policy further generates macroeconomic effects through a reduction in the price of capital, which results in lower investment and growth.