Ben Craig specializes in the economics of banking and international finance. As the economy continues to emerge from the recession, it is not yet clear how sustainable the recovery is. One concern is the strength of bank lending and banks' apparent preference to hold reserves instead of lending to consumers and businesses. Banks are required to hold a percentage of their customers' transaction accounts as reserves at the Federal Reserve, but reserve balances greater than those required are considered to be excess reserves.
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Bank reserves are the cash minimums that must be kept on hand by financial institutions in order to meet central bank requirements. The bank cannot lend the money but must keep it in the vault, on-site or at the central bank, in order to meet any large and unexpected demand for withdrawals. In the U. Bank reserves are essentially an antidote to panic. The Federal Reserve obliges banks to hold a certain amount of cash in reserve so that they never run short and have to refuse a customer's withdrawal, possibly triggering a bank run.
Why are U. And what should executives learn from this massive growth in corporate cash holdings? The question is why, and what should executives learn from this massive growth in corporate cash holdings?
As a consequence of the Federal Reserve's response to the financial crisis of —08 and the Great Recession, the supply of reserves in the U. Historically, over long horizons, money and prices have been closely tied together, but over the past decade, prices have risen only modestly while base money reserves plus currency has grown substantially. A macroeconomic model helps explain this behavior and suggests some potential limits to the Fed's ability to increase the size of its balance sheet indefinitely while remaining consistent with its inflation-targeting policy.