Here’s a very excellent Ben Bernanke blog post on interest on reserves.  In one section he trolls Joe Stiglitz a bit who stated that banks might be sitting on reserves due to interest on reserves (something I also criticized in this post):

“This claim, made even by some good economists, is puzzling. Before December, the Fed paid banks one-quarter of one percent on their reserves. If the Fed had not paid interest, the return to reserves would have been zero. Accordingly, the only potential loans that would have been affected by the Fed’s payment of interest are those with risk-adjusted short-term returns between precisely zero and one-quarter percent—surely a tiny fraction of the total. In fact, over the last four years bank lending has increased at about a 5 percent annual pace (including around a 7 percent annual rate the past two years), with only residential mortgage lending lagging in the aftermath of the housing bust. “

Here’s Tyler Cowen, saying that he’s not convinced:

“Without IOR, what do Fed models predict would have been the price level impact of those trillions of new reserves following 2008?  (Note that at some margin banks can just convert those new reserves into dividends, without any additional lending, if they are so satiated with trillions of unwanted liquidity. I’m not saying it would happen that way, but think of that as a limiting case.)  No, I’m not advocating hyperinflation, but less sterilization of those new reserves would have maintained aggregate demand at a higher level post-2008, boosting investment, output, and employment through a quite traditional channel, as advocated say by the market monetarists. “

Bernanke wins this fight with a 1st round KO. What Tyler is implying is that these reserves would have somehow been inflationary had they not been suppressed by IOR. As if banks are sitting on this money earning interest because the Fed has incentivized them not to spend it or lend it out. Of course, as I’ve noted so many times, banks don’t lend reserves to non-banks. But more importantly, let’s look at the basic accounting of reserve increases between banks and the Fed as a result of QE: