A note on interest on required reserves as an instrument of monetary control

The purpose of this paper is to evaluate the potential role of interest on required reserves as a monetary control instrument. It is found that an increase in the interest rate paid on reserves held at the Federal Reserve has counteracting effects on the variability of the money stock. Hence, there is an optimal setting for the interest rate on required reserves that theoretically may include or lie anywhere between the extreme cases of no interest payment and the payment of interest at the maximum feasible level.