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The effect of changes in reserve requirements on investment and GNP

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  • Prakash Loungani
  • Mark Rush

Abstract

The authors investigate the impact of 'credit shocks' on real activity by using changes in reserve requirements to measure shocks to financial intermediation. Reserve requirement changes are often made for bank regulatory reasons and, hence, are far more exogenous with respect to macroeconomic developments than the credit variables used in earlier tests. The authors present reduced-form evidence that, even after controlling for the link between monetary aggregates and real activity, an increase in reserve requirements lowers aggregate investment, real GNP, and commercial and industrial lending by banks. Copyright 1995 by Ohio State University Press.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series, Macroeconomic Issues with number 91-21.

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Date of creation: 1991
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Handle: RePEc:fip:fedhma:91-21

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Keywords: Bank reserves ; Gross national product;

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References

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  1. Prakash Loungani & Mark Rush, 1994. "The effect of changes in reserve requirements on investment and GNP," International Finance Discussion Papers 471, Board of Governors of the Federal Reserve System (U.S.).
  2. 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.
  3. Mark L. Gertler, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," NBER Working Papers 2559, National Bureau of Economic Research, Inc.
  4. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  5. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  6. Robert J. Gordon & John Veitch, 1986. "Fixed Investment in the American Business Cycle, 1919-83," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 267-358 National Bureau of Economic Research, Inc.
  7. Alan S. Blinder & Joseph E. Stiglitz, 1983. "Money, Credit Constraints, and Economic Activity," NBER Working Papers 1084, National Bureau of Economic Research, Inc.
  8. Robert J. Barro & Mark Rush, 1979. "Unanticipated Money and Economic Activity," NBER Working Papers 0339, National Bureau of Economic Research, Inc.
  9. Anil K. Kashyap & Jeremy C. Stein & David W. Wilcox, 1991. "Monetary policy and credit conditions: evidence from the composition of external finance," Finance and Economics Discussion Series 154, Board of Governors of the Federal Reserve System (U.S.).
  10. Mark L. Gertler & R. Glenn Hubbard, 1988. "Financial Factors in Business Fluctuations," NBER Working Papers 2758, National Bureau of Economic Research, Inc.
  11. 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.
  12. Ben S. Bernanke & Alan S. Blinder, 1988. "Credit, Money, and Aggregate Demand," NBER Working Papers 2534, National Bureau of Economic Research, Inc.
  13. Charles I. Plosser, 1989. "Money and business cycles: a real business cycle interpretation," Proceedings, Federal Reserve Bank of St. Louis.
  14. Rush, Mark, 1986. "Unexpected Money and Unemployment, 1920 to 1983," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(3), pages 259-74, August.
  15. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
  16. 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.
  17. Manchester, Joyce, 1989. "How Money Affects Real Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 16-32, February.
  18. 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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