excess reserves. paying interest on required reserve balances would greatly reduce the incentive for banks to conduct sweep programs and would therefore raise the level of transactions deposits and hence reserves. this would diminish the risk that further declines in required reserve balances would increase the volatility of the funds rate. in the absence of such new statutory authority, the fed has indicated it might need to alter the way it implements monetary policy, in the event that required reserve balances fell further and the volatility of the funds rate increased. to date, because the volatility of the funds rate has not increased, moving in this direction has not been necessary. however, if the volatility of the funds rate did increase, one possibility would be to introduce a regime of floors and ceilings that would limit the fluctuation in the federal funds rate to an acceptable range. the ceiling could be set through a so - called lombard facility at which banks would be able to borrow at a penalty rate, perhaps 50 basis points above the the debate was touched off by a provocative paper by friedman ( 1999 ) which in turn provoked a series of papers on the same topic, including king ( 1999 ), freedman ( 2000a and b ), goodhardt ( 2000 ), and woodford ( 2001 ). target funds rate. banks would never pay more than 50 basis points above the target funds rate to borrow reserves if they had access to such a facility and if borrowing from the facility had no nonpecuniary cost. the floor would be set through a re - deposit facility at which banks could deposit any unwanted reserves with the fed at a rate perhaps 50 basis points below the target funds rate. banks would never lend in the market at a rate lower than 50 basis points below the target funds rate if they had access to such a re - deposit facility. the funds rate would thus be limited to a 100 - basis range, and open market operations would aim to keep the funds rate on average near the midpoint. in principle, the system could work with somewhat narrower or wider ranges. the same system could be implemented if the spread of e - money reduced the demand for transactions balances and hence the level of required reserves. such a system is common, indeed almost the norm for other central banks, in the conduct of monetary policy. so there has been a lot of experience with it and the united states could presumably implement it, although a statutory change might be needed to set up a re - deposit

duvvuri subbarao : india and the global financial crisis transcending from recovery to growth comments by dr duvvuri subbarao, governor of the reserve bank of india, at the peterson institute for international economics, washington dc, 26 april 2010. * * * 1. india clocked average growth of 9 per cent per annum in the five years to 2007 / 08. that growth momentum was interrupted by the financial crisis which impacted india too, more than we had originally thought but less than it did most other countries. despite falling below 6 per cent for one quarter, the growth for the full year 2008 / 09 was a resilient 6. 7 per cent. current estimates are that the economy had grown between 7. 2 and 7. 5 per cent for the just ended fiscal year 2009 / 10 and that growth for 2010 / 11 will be 8 + per cent. the quick turn in sentiment following the uncertainty and anxiety of the crisis period has seen the return of the faq : when will india get on to double digit growth? 2. for policy makers, the faq translates to three nuanced questions : ( i ) in the short term, how do we restore the economy to its trend rate of growth while maintaining price stability? ( ii ) in the medium term, how do we raise the trend rate of growth itself without compromising financial stability? ( iii ) how do we ensure that growth is inclusive? 3. india is such an over analyzed country that it is difficult to be original. the answers to all the three questions above are all out there in the open, and they involve moving on with a host of structural and governance reforms. i want to use this platform provided by the peterson institute to comment on a few issues on the reform agenda that are relevant to the reserve bank of india. capital flows 4. volatile capital flows have been a central issue during the crisis, and continue to be so now as the crisis is ebbing. emerging market economies ( emes ) saw a sudden stop and reversal of capital flows during the crisis as a consequence of global deleveraging. now the trend has reversed once again, and many emes are seeing net inflows – a consequence of a global system awash with liquidity, the assurance of low interest rates in advanced economies over “ an extended period ” and the prospects of robust growth in emes. the familiar question of how emes can maximize the benefits and minimize the costs of volatile capital