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New Research on Paying Interest on Bank Reserves and Foreign Aid

Summary:
Should the Fed Pay Interest on Bank Reserves? Scott Sumner | Policy Brief For the first 95 years of its existence, the Federal Reserve (Fed) did not pay any interest on money that commercial banks deposited at the Fed. These deposits at the Fed, which are considered bank reserves, were treated no differently from reserves held as vault cash, which also earned no interest. Then, on October 8, 2008, the Fed suddenly began paying interest on reserves (IOR) deposited at the Fed. While the decision to pay IOR was not particularly controversial at the time (other central banks had been doing this for years), it radically changed the nature of US monetary policy. The lack of controversy may have partially reflected confusion over the nature of monetary policy before 2008. Hasn’t the Fed always

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Should the Fed Pay Interest on Bank Reserves?

Scott Sumner | Policy Brief

For the first 95 years of its existence, the Federal Reserve (Fed) did not pay any interest on money that commercial banks deposited at the Fed. These deposits at the Fed, which are considered bank reserves, were treated no differently from reserves held as vault cash, which also earned no interest. Then, on October 8, 2008, the Fed suddenly began paying interest on reserves (IOR) deposited at the Fed.

While the decision to pay IOR was not particularly controversial at the time (other central banks had been doing this for years), it radically changed the nature of US monetary policy. The lack of controversy may have partially reflected confusion over the nature of monetary policy before 2008. Hasn’t the Fed always been controlling interest rates? So what makes the adoption of IOR so revolutionary? And should the Fed be paying interest on bank reserves? In my view, there is a danger that IOR will further entrench the Fed’s interest-rate-targeting approach to policy, which proved woefully inadequate during the Great Recession.

The Role of Entrepreneurs in Facilitating Remittances in Cuba

Stefanie Haeffle and Anne Hobson | Book Chapter

In times of crises—whether economic or political, natural or man-made—individuals seek to help those in need.  Such aid may be given directly to family and friends or through charities and government-led initiatives, and may be targeted to those in need in one's own community, in their current or home country, or across the globe.  The characteristics and consequences of the crisis, and the individual needs of those impacted by crisis, is context-specific and plagued with uncertainty.  Read more of this work in Lessons on Foreign Aid and Economic Development.

Aid Allocation and Outcomes: What Role Do Political Motives Play?

Claudia Williamson and Nabamita Dutta | Book Chapter

And extensive literature has emerged in both economics and political science that investigates political motivations behind aid allocation to recipient nations.  A separate but related strand of literature talks about the impact of such aid allocation resulting out of political motivations on different development outcomes including economic growth.  Read more of this work in Lessons on Foreign Aid and Economic Development.

Can Foreign Aid Promote Political and Economic Freedom?

Claudia Williamson, Nabamita Dutta, and Michael A. Fakutiju | Book Chapter

Political and economic freedom are seen as values in themselves, are associated with increases in quality of life across many dimensions, and are often espoused by donors as a goal for foreign aid.  An extensive literature exists examining foreign aid's effect on institutional quality; however, robust evidence regarding these associations are mixed.  Read more of this work in Lessons on Foreign Aid and Economic Development.

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