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Implementation of Monetary Policy in a Regime with Zero Reserve Requirements

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  • Kevin Clinton

Abstract

Monetary policy can be implemented effectively without reserve requirements as long as cost incentives ensure a predictable demand for settlement balances. A central bank can then achieve the level of short-term interest rates that it desires, using market-oriented instruments only. In Canada, the framework provided by rules on interbank payments settlement and by the costs of deficits and surpluses on settlement accounts provides a strong incentive for the banks and other clearing institutions to target zero balances. Reforms of this framework, to follow the introduction of the Large-Value Transfer System, will ensure its continued effectiveness and make it more transparent. An appendix outlines the process by which reserve requirements were phased out in Canada.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 97-8.

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Length: 25 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:bca:bocawp:97-8

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Keywords: Monetary policy implementation;

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References

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  1. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper 90-06, Federal Reserve Bank of Richmond.
  2. Coletti, D. & Hunt, B. & Rose, D. & Tetlow, R., 1996. "The Bank of Canada's New Quarterly Projection Model. Part 3 , the Dynamic Model : QPM," Technical Reports 75, Bank of Canada.
  3. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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Citations

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Cited by:
  1. Amir Kia, 2006. "Economic policies and demand for money: evidence from Canada," Applied Economics, Taylor & Francis Journals, vol. 38(12), pages 1389-1407.
  2. Jeffrey M. Wrase, 1998. "Is the Fed being swept out of (monetary) control?," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-12.
  3. Michael Woodford, 2001. "Monetary policy in the information economy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 297-370.
  4. Morten L Bech & Cyril Monnet, 2013. "The Impact of Unconventional Monetary Policy on the Overnight Interbank Market," RBA Annual Conference Volume, in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.), Liquidity and Funding Markets Reserve Bank of Australia.
  5. Michael Woodford, 2000. "Monetary Policy in a World Without Money," NBER Working Papers 7853, National Bureau of Economic Research, Inc.
  6. Clouse, James A. & Dow, James Jr., 2002. "A computational model of banks' optimal reserve management policy," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1787-1814, September.
  7. Amir Kia, 2002. "Demand for Money, Economic Policies, and Stability," Emory Economics 0211, Department of Economics, Emory University (Atlanta).
  8. William Whitesell, 2003. "Tunnels and reserves in monetary policy implementation," Finance and Economics Discussion Series 2003-28, Board of Governors of the Federal Reserve System (U.S.).
  9. Nadja Kamhi, 2006. "LVTS, the Overnight Market, and Monetary Policy," Working Papers 06-15, Bank of Canada.
  10. 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.
  11. 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.).

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  1. Monetary policy of the United States in Wikipedia English ne '')

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