Fed does not "take in" bank reserves. Fed creates bank reserves in exchange for treasury securities. It is an asset swap. Treasury could do same thing by swapping bills for bonds. Also, Fed cannot meaningfully "default"-- how can an agency that "prints money" default?
The Bank of England theory.
Mr. Andolfatto forget to mention the Fed is an accelerating function of reserve creation when it cannot get back to neutral. It is, in essence, creating a pile up of reserves at run time and private deposits need an extra steps to adjust. By keeping a pile up, the Fed takes a monopoly premium and can get its position back to neutral.
The Fed will not default, instead velocity will go to one and that means Fed seigniorage is competing with legislative tax collection. At that point we all revisit the three pillars of monetary base.
We need to expand the Overon Window at the FRB. You are headed for a visit to the Supremes if not.
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