This post assumes you have read “Supply and Demand for the Monetary Base: How the Fed Currently Determines Interest Rates” and “How the Fed Could Use Capped Reserves and a Negative Reverse Repo Rate Instead of Negative Interest on Reserves.” This diagram combines the argument of those two posts. Note that in the situation diagrammed above the interest rate is negative (say an annual rate of -2%) even though the interest rate on reserves is zero.

In the graph above, the vertical portion of the demand for the monetary base is at the cap, which technically is on reserves, but is effectively on reserves plus currency because the cap on reserves declines 1 for 1 with any increase in currency and rises with any reduction in currency.

Two Terminological Issues

What is the Monetary Base in this Situation? In this system, it would make sense to measure the monetary base not as currency + reserves, but as currency + reserves + reverse repo-based loans to the Fed. If one insists on measuring the monetary base as currency + reserves, then the monetary base would be much larger in the daytime when reverse repo balances have turned back into reserves. (There is no cap on reserves in the daytime. Only at night.) So measuring the monetary base as currency + reserves + reverse repo-based loans to the Fed is equivalent to a daytime measure of currency + reserves.

By the way, I would like to get clear whether, currently, the monetary base is measured by its daytime value or its nighttime value. Reverse repo balances are already substantial.

What Should We Call Reserves Over the Cap? I have found myself tempted to call reserves over the cap “excess reserves,” which of course won’t do because “excess reserves” is already in use for reserves beyond required reserves. I propose “overcap reserves” for reserves beyond the cap that get routinely swept into the reverse-repo-based overnight facility every evening. “Overcap reserves” is short and pithy and gets the job done.