Suppose the Central Bank of Turkey starts to pay interest on reserves. Under what circumstances this...
Suppose the Central Bank of Turkey starts to pay interest on reserves. Under what circumstances this would affect the short term policy interest rate?
Homework Answers
The central bank of a country is responsible for ultimate interest rate policy of a nation. Every commercial bank in a country has to put a particular percentage of their deposits as reserves in the central bank. In this case, if the central bank of Turkey will start to pay interest on reserves that it keeps, then it will be positive for commercial banks, as they will get income from putting their money into central bank. Since banks can now get interest on their reserves they will put more funds with central bank. This will allow the bank to increase the size of its balance sheet and perform open market operations more easily. This, in turn, will put a downward pressure on the short term policy interest rates that will be beneficial for economy in general.
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Suppose the Central Bank of Turkey starts to pay
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