3 ms·

Of course the existence of reserves doesn't force a bank to lend. It increases their capacity to lend, which, assuming there is sufficient demand for credit, in

by darawk 6y ago

Of course the existence of reserves doesn't force a bank to lend. It increases their capacity to lend, which, assuming there is sufficient demand for credit, increases the money supply.

RobertoG 6y ago
So you agree that creating reserves is not necessarily inflationary. Also, a bank is not limited by reserves to lend. In fact, in practice, banks first lend and then search for the reserves in the inter-bank market. Those demand-offer dynamics between banks determine the interest rate. If the Central Bank doesn't want to loss control of the interest rate, it has to increase reserves in the system when there is demand. Central Banks have to choose, or they control the quantity or reserves or they control the interest rate. They target the later. The quantity is kind of irrelevant.
- darawk 6y ago
  > So you agree that creating reserves is not necessarily inflationary. Not necessarily, no. But in practice they create inflationary pressure. > Also, a bank is not limited by reserves to lend. In fact, in practice, banks first lend and then search for the reserves in the inter-bank market. Those demand-offer dynamics between banks determine the interest rate. If the Central Bank doesn't want to loss control of the interest rate, it has to increase reserves in the system when there is demand. This is exactly what my original post said. Of course they search for reserves in the inter-bank lending market. But the more reserves there are in that market, the cheaper they are to borrow, which reduces the rate that banks have to charge to earn their spread, which increases demand for credit, which increases the money supply.
jganetsk 6y ago
Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves By Standard and Poor's https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_8_14_13.pdf https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me...

by darawk 6y ago

Of course the existence of reserves doesn't force a bank to lend. It increases their capacity to lend, which, assuming there is sufficient demand for credit, increases the money supply.

RobertoG 6y ago

So you agree that creating reserves is not necessarily inflationary. Also, a bank is not limited by reserves to lend. In fact, in practice, banks first lend and then search for the reserves in the inter-bank market. Those demand-offer dynamics between banks determine the interest rate. If the Central Bank doesn't want to loss control of the interest rate, it has to increase reserves in the system when there is demand. Central Banks have to choose, or they control the quantity or reserves or they control the interest rate. They target the later. The quantity is kind of irrelevant.

darawk 6y ago
> So you agree that creating reserves is not necessarily inflationary. Not necessarily, no. But in practice they create inflationary pressure. > Also, a bank is not limited by reserves to lend. In fact, in practice, banks first lend and then search for the reserves in the inter-bank market. Those demand-offer dynamics between banks determine the interest rate. If the Central Bank doesn't want to loss control of the interest rate, it has to increase reserves in the system when there is demand. This is exactly what my original post said. Of course they search for reserves in the inter-bank lending market. But the more reserves there are in that market, the cheaper they are to borrow, which reduces the rate that banks have to charge to earn their spread, which increases demand for credit, which increases the money supply.

jganetsk 6y ago

Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves By Standard and Poor's https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_8_14_13.pdf https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me...