Implementing monetary policy with excess reserves: fiscal implications for the euro area

This paper shows that the current operational framework of monetary policy relying on excess liquidity, together with a high level of interest rates, produces a remarkable redistribution of interest payments across the national central banks of the Eurosystem, due to the rules governing the pooling of monetary income among them. This mechanism implies significant fiscal transfers across the member countries of the euro area. Our estimates for 2023 show that their size can be in the order of several billion euro. A way to limit those cross-country subsidies would be to increase the unremunerated minimum reserve requirement. Another remedy may come from a more even distribution of excess reserves across the euro area: the recent review of the ECB’s operational framework goes in that direction. Finally, the paper calls for a better alignment between the income pooling and risk-sharing rules, as far as the Eurosystem’s government bond holdings are concerned.