Monetary policy without reserve requirements: analytical issues
AbstractReserve requirements have traditionally been viewed as a key instrument of monetary policy. Indeed, textbook discussions of monetary policy typically center on the role of reserve requirements in determining the size of the money multiplier and the magnitude of bank credit expansion. In recent years, however, there has been a significant decline in the use of reserve requirements in the United States and in other industrialized countries. Many countries have made substantial cuts in the level of reserve requirements, and some countries have eliminated reserve requirements altogether.> The declining use of reserve requirements has two important implications for monetary policy. First, in the absence of a binding level of reserve requirements, the demand for central bank balances is no longer determined by the public's demand for transactions and term deposits but, instead, depends on depository institutions' need to hold balances for clearing and settlement purposes. This means that there is a direct connection between the payments system and monetary policy and implies that institutional changes in the payments system, such as new clearing and settlement methods, may require corresponding changes in monetary policy operating procedures. Second, the absence of binding reserve requirements may lead to increased volatility of short-term interest rates and impair the ability of central banks to implement monetary policy. If so, central banks may have to adapt operating procedures to contain this volatility.> In the first of two articles, Sellon and Weiner analyze the implications for monetary policy of the declining use of reserve requirements. The companion article, to be published in a future issue of the Review, will look at three countries that have eliminated reserve requirements Canada, the United Kingdom, and New Zealand and ask whether adaptations to monetary policy procedures in those countries could be extended to the United States.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Federal Reserve Bank of Kansas City in its journal Economic Review.
Volume (Year): (1996)
Issue (Month): Q IV ()
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LDayrit).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.