IDEAS home Printed from
   My bibliography  Save this article

A Mathematical Model and Programme Support for Determination of the Values of the Marginal Reserve Requirement as Instrument of Monetary Policy


  • Darko Pongrac

    (Croatian National Bank, Zagreb)

  • Kristina Soric

    (Faculty of Economics, Zagreb)

  • Visnja Vojvodic Rosenzweig

    (Faculty of Economics, Zagreb)


This paper studies the problem of interdependence between central bank and commercial bank goals. The basic central bank task is to achieve and to maintain price stability. Croatian external debt has been increasing for years and so the activities of the Croatian National Bank are designed to correct this situation. In order to stop the further increase of the external debt, the Croatian National Bank uses several monetary policy instruments, among which is the marginal reserve requirement. On the other hand, the goal of commercial banks is to maximise profits. Banks take loans from abroad at a lower interest rate and invest this money in Croatia at a higher interest rate, thus fulfilling their goal. In order to obtain the desired effects of the marginal reserve requirement, its optimal percentage value should be determined. This problem is modelled as a bi-level mixed 0-1 programming problem. The objective of the leader (Croatian National Bank) is to minimize the increase in household loans by setting different percentages of the reserve requirements for loans extended to households and for those granted to enterprises. The objective of the followers (banks) is to maximize profits. In order to solve this NP-hard problem a heuristic is proposed. In order to verify the model, the paper ends with simulations and the presentation of computational results.

Suggested Citation

  • Darko Pongrac & Kristina Soric & Visnja Vojvodic Rosenzweig, 2007. "A Mathematical Model and Programme Support for Determination of the Values of the Marginal Reserve Requirement as Instrument of Monetary Policy," Financial Theory and Practice, Institute of Public Finance, vol. 31(3), pages 249-278.
  • Handle: RePEc:ipf:finteo:v:31:y:2007:i:3:p:249-278

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Buyang Cao & Fred Glover, 1997. "Tabu Search and Ejection Chains---Application to a Node Weighted Version of the Cardinality-Constrained TSP," Management Science, INFORMS, vol. 43(7), pages 908-921, July.
    2. Ellison, Martin & Valla, Natacha, 2001. "Learning, uncertainty and central bank activism in an economy with strategic interactions," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 153-171, August.
    Full references (including those not matched with items on IDEAS)

    More about this item


    monetary policy instruments; commercial banks credit activity; marginal reserve requirement; bi-level mixed 0-1 programming problem; NP-hard problem; heuristic;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ipf:finteo:v:31:y:2007:i:3:p:249-278. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martina Fabris). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.