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Reserve Requirement Analysis using a Dynamical System of a Bank based on Monti-Klein model of Bank's Profit Function

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  • Novriana Sumarti
  • Iman Gunadi
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    Abstract

    Commercial banks and other depository institutions in some countries are required to hold in reserve against deposits made by their customers at their Central Bank or Federal Reserve. Although some countries have been eliminated it, this requirement is useful as one of many Central Bank's regulation made to control rate of inflation and conditions of excess liquidity in banks which could affect the monetary stability. The amount of this reserve is affected by the volumes of the commercial bank's loan and deposit, and also by the bank's Loan to Deposit Ratio (LDR) value. In this research, a dynamical system of the volume of deposits (dD/dt) and loans (dL/dt) of a bank is constructed from the bank profit equation by Monti-Klein. The model is implemented using the regulation of Bank of Indonesia, and analysed in terms of the behaviour of the solution. Based on some simplifying assumptions in this model, the results show that eventhough the LDR values at the initial points of two solutions are the same, the behavior of solutions will be significantly different due to different magnitude of L and D volumes.

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    File URL: http://arxiv.org/pdf/1306.0468
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    Paper provided by arXiv.org in its series Papers with number 1306.0468.

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    Date of creation: Jun 2013
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    Handle: RePEc:arx:papers:1306.0468

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    1. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, December.
    2. Christopher Ball & Javier Reyes, 2009. "International reserve holdings: interest rates matter!," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(4), pages 343-348.
    3. Zhao, Juan, 2009. "Long time behaviour of stochastic interest rate models," Insurance: Mathematics and Economics, Elsevier, vol. 44(3), pages 459-463, June.
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