[neilwilson]

Banks can't get rid of reserves at the central bank in aggregate. They can only get rid of them to other banks. So there is no need for the central bank to pay them.

Since there are always more reserves than required, and no alternative source of interest, the inter bank rate would be driven to zero by supply and demand. That's then the 'market rate'.

You can't hold reserves so the bank can charge you extra for borrowing money. Only banks can get zero.

How do you think central bank rates bind? It gives banks an alternative source of interest other than lending them to each other.

[flurben]

ok. it seems our differences here are more in definitions and semantics

I interpret the phrase 'left to their own devices' to mean that there is no central bank and therefore reserves are as a concept are null and void, which then also nullify the concept of a federal funds rate, which would upend the concept of the federal funds rate being 'the market rate' in the first place.

I'll take your word for it about the mechanics of what happens to inter-bank rates under different reserve mechanisms, perhaps they would be driven to zero for the reasons you outlined.

However I'm unclear on what the macroeconomic ramifications would be of letting a small group of banks dictate the federal funds rate; I believe the purpose of this system is to achieve a congressional directive regarding price stability and labor utilization.