Exit Strategies (Research Paper Sample)

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Exit Strategies
In this case, the exit is required from the action by financial institution to hold extra reserves to increase their profit margins. This trend is influenced by the fact that banks develop the tendency to cash on increased interest rates and an expanding economy (Thornton 1). In addition, the institutions are allowed to increase or minimize their reserves. Increased baking reserves has adverse effects on the economy. For this reason, the Federal Reserve is tasked with the responsibility of analyzing the amount of reserve laced by financial institutions. The strategy is aimed at ensuring the economy is not depleted of financial resources as caused by increased reserves. In an instance where there are large banking reserves, an efficient exit strategy is required.
In an argument by Thornton the most efficient exit strategy is paying interests on excess reserves (1). The strategy would require the government to heavily spend in the payoff to acquire the excess reserves. Regardless of the quantity of the expenditure, Thornton asserts that the strategy is the only way that financial institution would agree to not hold excess reserves (1). The author further points out that all exit strategies are expensive but paying interests on excess reserves would be the most functional strategy (Thornton 1). The strategy would also be in consideration that the cost of paying IOER will have to increase with increased interest rates (Thornton 2). This would allow financial institutions to consider the strategy the best alternative.
Regardless of the deficit that may be caused on the treasury, the paying IOER exit strategy would ensure tha...