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The promises and pitfalls of contemporaneous reserve requirements for the implementation of monetary policy

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  • Marvin Goodfriend

Abstract

In February of this year, the Federal Reserve Board changed the rules by which banks’ required reserves are calculated; the previous system of lagged reserve requirements was replaced by contemporaneous reserve requirements (or CRR). According to the Board, the new reserve accounting system will improve the implementation of monetary policy by strengthening the linkage between bank reserves and the money supply. However, according to Marvin Goodfriend, author of “The Promises and Pitfalls of Contemporaneous Reserve Requirements for the Implementation of Monetary Policy,” the benefits of CRR are not obtainable with operating procedures that target either the Federal funds rate or nonborrowed reserves. Goodfriend presents the case for combining CRR with total reserve targeting. He argues that, compared with Federal funds rate or nonborrowed reserve targeting, a procedure in which total reserves are targeted would minimize the number of difficult economic and political decisions the Fed has to make, protect against pressure to help finance the budget deficit, and make the Fed’s effort to stabilize the price level both more credible and more effective.

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File URL: http://www.richmondfed.org/publications/research/economic_review/1984/pdf/er700301.pdf
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Bibliographic Info

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

Volume (Year): (1984)
Issue (Month): May ()
Pages: 3-12

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Handle: RePEc:fip:fedrer:y:1984:i:may:p:3-12:n:v.70no.3

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Keywords: Monetary policy;

References

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  1. Marvin Goodfriend, 1981. "Discount window borrowing, monetary policy, and the post-October 6, 1979 Federal Reserve operating procedure," Working Paper 81-02, Federal Reserve Bank of Richmond.
  2. Frederick R. Macaulay, 1938. "Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856," NBER Books, National Bureau of Economic Research, Inc, number maca38-1.
  3. Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 598-606, May/June.
  4. Poole, William, 1982. "Federal Reserve Operating Procedures: A Survey and Evaluation of the Historical Record since October 1979," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 575-96, November.
  5. William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
  6. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
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Cited by:
  1. Steven Russell & Marco Espinosa, 1990. "The inflationary effects of the use of reserve ratio reductions, or open market purchases, to reduce market interest rates: a theoretical comparison," Working Papers 1990-006, Federal Reserve Bank of St. Louis.
  2. Daniel L. Thornton, 1984. "An early look at the volatility of money and interest rates under CRR," Review, Federal Reserve Bank of St. Louis, issue Oct, pages 26-32.
  3. Benjamin M. Friedman, 1991. "Targets and Instruments of Monetary Policy," NBER Working Papers 2668, National Bureau of Economic Research, Inc.

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