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Reserve Requirements and Bubbles

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  • ASAOKA Shintaro

Abstract

This study investigates the effectiveness of the reserve requirement policy as a preventive measure against economic bubbles. In the existing literature, it has been pointed out that the expansion of bubbles can be prevented by raising the required reserve ratio. The present study demonstrates this may not be the case. If the ratio is below a certain threshold, the conventional policy prediction fails or in other words, raising the required reserve ratio expands a bubble. If, in contrast, the ratio is above the threshold, it prevents the expansion of the bubble (or the conventional prediction holds). In either case, a policy of raising the reserve requirement is welfare reducing in our model. This implies that if the ratio is below the threshold, the optimal policy is to cut the required reserve ratio, which will increase welfare while at the same time that it will reduce the bubble.

Suggested Citation

  • ASAOKA Shintaro, 2020. "Reserve Requirements and Bubbles," Discussion papers 20042, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:20042
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