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Monetary policy without reserve requirements : case studies and options for the United States

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  • Gordon Sellon, Jr.
  • Stuart E. Weiner
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    Abstract

    Over the past decade, the level of required balances held by depository institutions in the United States has declined dramatically. The decline in reserve balances has fueled a debate over the role of reserve requirements. On the one hand, proponents of reserve requirements argue that low reserve balances may complicate monetary policy operations and increase short-term interest rate volatility. On the other hand, critics of reserve requirements argue that lower reserve requirements remove a distortionary tax on depository institutions and need not complicate monetary policy operations. ; In this article, the authors examine how three countries - Canada, the United Kingdom, and New Zealand conduct monetary policy without using reserve requirements. The experience of these three countries provides insight into the linkages between the payments system and monetary policy and into the connection between reserve requirements and interest rate volatility. This insight is particularly helpful in understanding the implications of a further reduction of reserve balances in the United States.

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    File URL: http://www.kansascityfed.org/publicat/econrev/pdf/2q97wein.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

    Volume (Year): (1997)
    Issue (Month): Q II ()
    Pages: 5-30

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    Handle: RePEc:fip:fedker:y:1997:i:qii:p:5-30:n:v.82no.2

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    Related research

    Keywords: Monetary policy ; Bank reserves ; Monetary policy - Canada ; Monetary policy - Great Britain ; Monetary policy - New Zealand;

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    Cited by:
    1. Nicolas Couderc, 2005. "Réserves obligatoires : un état des lieux," Revue d'Économie Financière, Programme National Persée, vol. 78(1), pages 363-380.
    2. Yueh-Yun C. O’Brien, 2007. "Reserve requirement systems in OECD countries," Finance and Economics Discussion Series 2007-54, Board of Governors of the Federal Reserve System (U.S.).
    3. Michael Woodford, 2001. "Monetary Policy in the Information Economy," NBER Working Papers 8674, National Bureau of Economic Research, Inc.
    4. Selva Demiralp & Dennis Farley, 2003. "Declining required reserves, funds rate volatility, and open market operations," Finance and Economics Discussion Series 2003-27, Board of Governors of the Federal Reserve System (U.S.).
    5. Xiaohui Zhang & Zhihong Ji & Yong Cui, 2009. "Reserve requirement, reserve requirement tax and money control in China: 1984–2007," Frontiers of Economics in China, Springer, vol. 4(3), pages 361-383, September.
    6. Bental, Benjamin & Eden, Benjamin, 2002. "Reserve requirements and output fluctuations," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1597-1620, November.
    7. Berk, Jan Marc, 2001. "New economy, old central banks? Monetary transmission in a new economic environment," Serie Research Memoranda 0032, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    8. Rodrigo Cifuentes S., 2001. "Encaje a los Depósitos: Argumentos Teóricos e Impcato en la Política de Liquidez de los Bancos," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 4(3), pages 97-101, December.
    9. Georg Rich, 1997. "Do Central Banks Need Minimum Reserves?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 133(IV), pages 691-708, December.

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