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The Effect of Changes in Reserve Requirements on Investment and GNP

  • Loungani, Prakash
  • Rush, Mark

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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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 27 (1995)
Issue (Month): 2 (May)
Pages: 511-26

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Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:2:p:511-26
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  1. 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.
  2. 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.
  3. Charles I. Plosser, 1989. "Money and business cycles: a real business cycle interpretation," Proceedings, Federal Reserve Bank of St. Louis.
  4. Robert J. Barro & Mark Rush, 1979. "Unanticipated Money and Economic Activity," NBER Working Papers 0339, National Bureau of Economic Research, Inc.
  5. Ben S. Bernanke & Alan S. Blinder, 1988. "Credit, Money, and Aggregate Demand," NBER Working Papers 2534, National Bureau of Economic Research, Inc.
  6. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
  7. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
  8. 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.
  9. Manchester, Joyce, 1989. "How Money Affects Real Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 16-32, February.
  10. Alan S. Blinder & Joseph E. Stiglitz, 1983. "Money, Credit Constraints, and Economic Activity," NBER Working Papers 1084, 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. 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.
  13. Rush, Mark, 1985. "Unexpected monetary disturbances during the gold standard era," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 309-321, May.
  14. Gertler, M.L. & Hubbard, R.G., 1988. "Financial Factors In Business Fluctuations," Papers fb-_88-37, Columbia - Graduate School of Business.
  15. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  16. 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.
  17. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
  18. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
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