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Section 4 provides a preliminary examination of setting the IORR at a different level than IOER in the course of conducting monetary policy under either policy regime.
Consequently, we conclude in Section 6 that the Fed could break up the equivalency between the IOER and the IORR without adversely affecting its ability to conduct monetary policy effectively within either policy regime.
Moreover, the Fed would gain wider latitude for responding to the next recession and for returning ultimately to a policy regime more attuned with the pre-October 2008 state of "normalcy."
For each policy regime, combining the first-order conditions with (5) and (6) yields general-equilibrium solutions for retail loans (L), deposits (D), market interest rates (rL and rD), wholesale lending to financial institutions (F), and excess reserves (X).6 Depending upon the operative regime, these solutions are functions of the Fed's settings of its policy instruments-the federal funds rate (rF), the interest rate on required reserves (rQ), and the interest rate on excess reserves (rX)-along with exogenous variables D and L , although some of the partial derivatives within these solutions equal zero.
In both policy regimes, the solution for bank deposits implies an equilibrium level of required reserves, which together with the solution for excess reserves endogenously yields the level of total reserves.
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