THE PERMANENT FLOOR 2004

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THE PERMANENT FLOOR 2004

By Scott Fullwiler
The discussion over the permanent floor has led to a (in my view) fantastic post from Steve Randy Waldman.  His key conclusions regarding how interest on reserve balances works are the following:

“Paying interest on reserves (excess or otherwise) and operating under a “floor system” are not the same thing. A floor system does require that interest be paid on reserves, but that is not sufficient. A floor system also requires an abundance of reserves (relative to private sector demand), such that the central bank would be unable achieve its target interest rate without paying interest at or above the target.”

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