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The effect of changes in reserve requirements on investment and GNP

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  • Prakash Loungani
  • Mark Rush

Abstract

This paper provides evidence on the importance of the credit channel in the transmission of monetary policy. Changes in reserve requirements are used to measure "credit shocks." Reserve requirement changes are often made for regulatory reasons, and hence provide a more exogenous measure of credit shocks than the measures used in previous tests. To distinguish between the "money" and "credit" channels, the significance of the reserve requirements variable is studied in an empirical model that includes other monetary aggregates (either the monetary base or M1). We find that an increase in reserve requirements lowers aggregate investment, real GNP and commercial and industrial (C&I) loans made by banks.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1994/471/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1994/471/ifdp471.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 471.

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Date of creation: 1994
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Handle: RePEc:fip:fedgif:471

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Related research

Keywords: Bank reserves ; Gross national product;

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References

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  1. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-88, August.
  2. G.J. Santoni, 1985. "The monetary control act, reserve taxes and the stock prices of commercial banks," Review, Federal Reserve Bank of St. Louis, issue Jun, pages 12-20.
  3. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  4. Alan S. Blinder & Joseph E. Stiglitz, 1983. "Money, Credit Constraints, and Economic Activity," NBER Working Papers 1084, National Bureau of Economic Research, Inc.
  5. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  6. Robert J. Barro & Mark Rush, 1980. "Unanticipated Money and Economic Activity," NBER Chapters, in: Rational Expectations and Economic Policy, pages 23-73 National Bureau of Economic Research, Inc.
  7. Joseph H. Haslag & Scott E. Hein, 1989. "Reserve requirements, the monetary base, and economic activity," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Mar, pages 1-15.
  8. Gertler, M.L. & Hubbard, R.G., 1988. "Financial Factors In Business Fluctuations," Papers fb-_88-37, Columbia - Graduate School of Business.
  9. Prakash Loungani & Mark Rush, 1991. "The effect of changes in reserve requirements on investment and GNP," Working Paper Series, Macroeconomic Issues 91-21, Federal Reserve Bank of Chicago.
  10. Manchester, Joyce, 1989. "How Money Affects Real Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 16-32, February.
  11. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  12. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May.
  13. Charles I. Plosser, 1989. "Money and business cycles: a real business cycle interpretation," Proceedings, Federal Reserve Bank of St. Louis.
  14. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
  15. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-80, June.
  16. Rush, Mark, 1985. "Unexpected monetary disturbances during the gold standard era," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 309-321, May.
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