Raising the rate of interest paid on excess reserves should play a central role in the eventual normalization of short-term interest rates. An overnight reverse repo facility could also play a useful part in setting a floor under money market rates.
In theory, the allocation of responsibility for risk-bearing between the private sector and the central bank depends upon the private cost of capital. In order to attract, or at least retain, capital, a private financial institution must earn at minimum the overall economy’s marginal cost of riskless capital, adjusted for firm-specific risk.