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A public finance analysis of multiple reserve requirements

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  • Marco Espinosa-Vega
  • Steven Russell

Abstract

This paper analyzes multiple reserve requirements of the type that have been imposed by a number of developing countries. We show that previous theoretical work on this topic has not succeeded in providing a social welfare rationale for the existence of multiple reserve requirements. We go on to present a model in which it is possible for a multiple reserves regime to improve social welfare relative to simpler regimes involving reserve requirements and/or deposit taxes. We demonstrate the empirical plausibility of our approach by providing a case study of Mexico, a country with extensive historical experience with multiple reserve requirements.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 99-19.

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Date of creation: 1999
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Handle: RePEc:fip:fedawp:99-19

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Keywords: Finance; Public ; Developing countries ; Mexico ; Bank reserves;

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References

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  1. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
  2. Scott Freeman & Joseph H. Haslag, 1996. "On the optimality of interest-bearing reserves in economies of overlapping generations (*)," Economic Theory, Springer, vol. 7(3), pages 557-565.
  3. Espinosa-Vega, Marco A, 1995. "Multiple Reserve Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 762-76, August.
  4. Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, vol. 83(4), pages 953-63, September.
  5. Marco Espinosa-Vega & Steven Russell, 1998. "A public finance analysis of multiple reserve requirements," Working Paper 98-1, Federal Reserve Bank of Atlanta.
  6. Neil Wallace, 1983. "A legal restrictions theory of the demand for "money" and the role of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  7. Mourmouras, Alex & Russell, Steven, 1992. "Optimal reserve requirements, deposit taxation, and the demand for money," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 129-142, October.
  8. Bruce D. Smith, 1984. "Money and inflation in colonial Massachusetts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  9. Joseph H. Haslag & Joydeep Bhattacharya, 1999. "Seigniorage in a neoclassical economy: some computational results," Working Papers 9901, Federal Reserve Bank of Dallas.
  10. Romer, David, 1985. "Financial intermediation, reserve requirements, and inside money: A general equilibrium analysis," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 175-194, September.
  11. Neil Wallace, 1984. "Some of the choices for monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  12. Smith, Bruce D, 1991. "Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 93-105, January.
  13. Sargent, Thomas & Wallace, Neil, 1985. "Interest on reserves," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 279-290, May.
  14. Freeman, Scott, 1987. "Reserve requirements and optimal seigniorage," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 307-314, March.
  15. Richard D. Porter & Ruth A. Judson, 1996. "The location of U.S. currency: how much is abroad?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 883-903.
  16. Espinosa-Vega, Marco A. & Russell, Steven, 2001. "Are There Optimal Multiple-Reserve Requirements?," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 85-104, January.
  17. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1212-36, December.
  18. Thomas J. Sargent & Neil Wallace, 1981. "The real bills doctrine vs. the quantity theory: a reconsideration," Staff Report 64, Federal Reserve Bank of Minneapolis.
  19. de Paso, Jose I. Garcia, 1997. "Multiple reserve requirements: an irrelevance result," Economics Letters, Elsevier, vol. 56(3), pages 333-338, November.
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Cited by:
  1. Marco Espinosa-Vega & Steven Russell, 1998. "A public finance analysis of multiple reserve requirements," Working Paper 98-1, Federal Reserve Bank of Atlanta.
  2. Patrick Honohan, 2003. "Taxation of Financial Intermediation : Theory and Practice for Emerging Economines," World Bank Publications, The World Bank, number 15122, August.

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