Monetary policy, compulsory deposits and inflation

Since the outset of the Real Plan, the government has resorted to much higherreserve requirements on bank’s liabilities, as well as to the creation of reserve requirementson credit (a bank’s asset) in the attempt to restrict the expansion of monetary aggregatesand credit. The policy intention was right, although the design of the reserve requirementsprofile, i.e., the relative structure of the reserve requirements on the different bank’s liabilities,was flawed. This is because there is a very high (initially a 100% marginal) reserverequirement on demand deposits, which is the liability that typically grows the most whenhigh inflations subside. Since the beginning of 1995, tax changes made profitable to transfereven very short-term funds from demand deposits to short term mutual funds. Furthermore,when such transfer is undertaken, the overall reserve requirement falls substantially. Themain policy recommendation is to use both the reserve requirements’ profile and the tax structure so that the aggregate financial wealth is distributed among its several componentsin a way compatible with low inflation. This will avoid future reallocations of portfolio,thereby increasing the efficacy of monetary policy. JEL Classification: E58; E52.