Friday, October 14, 2016

What makes reserves special Ricky Reis

Reserves really are special

"The power of QE comes from interest-paying reserves being a special financial asset with four distinct properties: 
  1. Reserves are held exclusively by banks. Only they can hold these deposits at the central bank. Therefore, the central bank can make sure that the shield against default that reserves provides leads to an automatic recapitalisation of the banking sector after public default.
  2. Reserves are supplied exclusively by the central bank. Therefore, it can freely set the interest that must be paid on them. The joint control by the central bank of the quantity of reserves, and the remuneration of these reserves, give it the power to control the time path of inflation.
  3. Reserves are default-free. In nominal terms they always pay in full so, as long as the central bank remains solvent, they are always honoured. Therefore, they are a safe asset for the financial sector.
  4. Reserves are the unit of account in the economy. Therefore, their nominal value never changes, but their real value falls if there is sudden inflation."