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Measuring the policy effects of changes in reserve requirement ratios

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  • Joseph H. Haslag
  • Scott E. Hein

Abstract

The monetary base is the sum of high-powered money and an adjustment factor that measures changes in reserve requirement ratios. This adjustment factor is calculated so that it responds to changes in deposit levels in addition to changes in reserve requirements. Consequently, researchers and policymakers using the monetary base are seeing a mixture of changes implemented through open market operations, discount window borrowings, and reserve requirements, together with nonpolicy actions acting on deposit flows. ; Joseph Haslag and Scott Hein calculate the reserve step index (RSI) to separate changes in one of the available adjustment factors-the St. Louis Federal Reserve Bank's Reserve Adjustment Measure (RAM)-into pure reserve-requirement effects and deposit-flow effects. RSI would give analysts a measure that responds only to changes in reserve requirement ratios. Haslag and Hein also provide statistical evidence suggesting that combining RSI and the deposit-flow effect, as RAM does, is not justifiable in simple reduced-form models of nominal GNP growth, output growth, or inflation.

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Bibliographic Info

Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1995)
Issue (Month): Q III ()
Pages: 2-15

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Handle: RePEc:fip:fedder:y:1995:i:qiii:p:2-15

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Keywords: Bank reserves;

References

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  1. Martin Feldstein & James H. Stock, 1993. "The Use of Monetary Aggregate to Target Nominal GDP," NBER Working Papers 4304, National Bureau of Economic Research, Inc.
  2. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-80, June.
  3. Charles I. Plosser, 1989. "Money and business cycles: a real business cycle interpretation," Proceedings, Federal Reserve Bank of St. Louis.
  4. Joseph H. Haslag & Scott E. Hein, 1990. "Does it matter how monetary policy is implemented?," Research Paper 9009, Federal Reserve Bank of Dallas.
  5. Loungani, Prakash & Rush, Mark, 1995. "The Effect of Changes in Reserve Requirements on Investment and GNP," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 511-26, May.
  6. Mark Toma, 1988. "The Role of the Federal Reserve in Reserve Requirement Regulation," Cato Journal, Cato Journal, Cato Institute, vol. 7(3), pages 701-726, Winter.
  7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  8. Albert E. Burger & Robert H. Rasche, 1977. "Revision of the monetary base," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 13-28.
  9. Balke, Nathan S. & Fomby, Thomas B., 1991. "Infrequent permanent shocks and the finite-sample performance of unit root tests," Economics Letters, Elsevier, vol. 36(3), pages 269-273, July.
  10. Frost, Peter A, 1977. "Short-Run Fluctuations in the Money Multiplier and Monetary Control," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 165-81, February.
  11. Joshua N. Feinman, 1993. "Reserve requirements: history, current practice, and potential reform," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 569-589.
  12. George S. Tolley, 1957. "Providing for Growth of the Money Supply," Journal of Political Economy, University of Chicago Press, vol. 65, pages 465.
  13. Freeman, Scott & Huffman, Gregory W, 1991. "Inside Money, Output, and Causality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 645-67, August.
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