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Interest on reserves and monetary policy of targeting both interest rate and money supply

Ngotran, Duong (2017): Interest on reserves and monetary policy of targeting both interest rate and money supply.

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Abstract

We build a dynamic model with currency, demand deposits and bank reserves. The monetary base is controlled by the central bank, while the money supply is determined by the interactions between the central bank, banks and public. In banking crises when banks cut loans, a Taylor rule is not efficient. Negative interest on reserves or forward guidance is effective, but deflation is still likely to be persistent. If the central bank simultaneously targets both the interest rate and the money supply by a Taylor rule and a Friedman's k-percent rule, inflation and output are stabilized.

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