Clarity on the Vanishing Reserve-Requirement Tax

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Abstract

Reserve requirements no longer tax deposits—or do they? Since 2008, U.S. banks earn interest on reserves and hold massive excess balances. I show the Bailey-Friedman tax hasn’t vanished but moved from average to marginal cost. Extending standard portfolio models, I derive when raising requirements imposes zero tax: $i_{RR} \ge i_L$ or $\Delta RR \le ER$. Federal Reserve data reveals extraordinary capacity: with 57% excess reserves relative to deposits, requirements could rise fifty-fold without distortion. This sharp boundary—requirements are either costless or fully taxing—reframes debates on macroprudential policy, seigniorage, and central bank operating frameworks.

Citation

Pusateri, Nicholas R. 2025. “Clarity on the Vanishing Reserve-Requirement Tax.” Working Paper. URL: https://nicpusateri.com/clarity

@article{pusateri2025clarity,
  title={Clarity on the Vanishing Reserve-Requirement Tax},
  author={Pusateri, Nicholas R.},
  journal={Working Paper},
  year={2025},
  url={https://nicpusateri.com/clarity},
  }