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Use and Limitations of the Reserve Requirement Policy in Montenegro

  • Velibor Milošević

    ()

    (Central Bank of Montenegro)

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    Since reserve requirement is the only monetary policy instrument used in Montenegro, it has been subject to frequent amendments since the global crisis outbreak. The analysis of the monetary demand model showed that there is an active transmission mechanism of change in the reserve requirement rate on the deposits trend reflects on lending activity. Also, there is a significant impact of FDIs on deposits trending in the banking system, as well as the positive impact of turnover on stock exchange on the deposits and loans trend. Finally, it was found that the financial crisis has caused negative trends in loans and deposits. On the other hand, the impact of changes in the reserve requirement on the economic activity in Montenegro could not be determined. This is primarily due to the fact that the transmission mechanism of the effect of reserve requirement on economic activity is too long to be able to estimate the model that does not allow the dynamics of the independent variables. The second reason is that industrial output index is only an indirect indicator of the economic activity.

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    File URL: http://www.cbcg.me/repec/cbk/journl/vol3no2-1.pdf
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    Article provided by Central bank of Montenegro in its journal Journal of Central banking Theory and Practice.

    Volume (Year): 3 (2014)
    Issue (Month): 2 ()
    Pages: 5-20

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    Handle: RePEc:cbk:journl:v:3:y:2014:i:2:p:5-20
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    1. Barro, Robert J, 1990. "The Stock Market and Investment," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 115-31.
    2. Cargill, Thomas F. & Mayer, Thomas, 2006. "The Effect of Changes in Reserve Requirements During the 1930s: The Evidence from Nonmember Banks," The Journal of Economic History, Cambridge University Press, vol. 66(02), pages 417-432, June.
    3. Slovin, Myron B. & Sushka, Marie E. & Bendeck, Yvette M., 1990. "The market valuation effects of reserve regulation," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 3-19, January.
    4. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
    5. Kashyap, Anil K. & Stein, Jeremy C., 1995. "The impact of monetary policy on bank balance sheets," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 151-195, June.
    6. Robert E. Lipsey, 2002. "Home and Host Country Effects of FDI," NBER Working Papers 9293, National Bureau of Economic Research, Inc.
    7. 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.
    8. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, August.
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