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Reserve requirements (liquidity, monetary policy, and the impact on the state budget)

  • Zbyněk Revenda
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    Reserve requirements has been part of the monetary policy instruments of banking in many countries including member countries of European Monetary Union and Czech Republic, too. But maintaining reserve requiremnts needs a contemporary rationale, no matter what their original purposes may have been. The obvious reasons to maintain reserve requiremets are to regulate bank liquidity, to conduct monetary policy (regulation of the money multiplier or short-term interest rates) and to pay the special "tax" to the state budget. This article deals especially with the third reason but the liquidity and monetary policy are also discussed. All three rationales seems not to be equivalent to the burden of the reserve requirements on the banking system and to the distorting effects on financial markets. Only in the countries with very limited possibilities to conduct monetary policy by means of other instruments, especially of daily open market operations, there may be maintaining of reserve requirements reasonable. There are two main approaches to removing the burden of reserve requirements and making the banks more competitive to other financial institutions - to eliminate reserve requirements altogether or to pay interest rate on them. Czech National Bank has been reducing the ratios of reserve requirements since 1996 from 11.5 % of bank primary deposits to the 2 % (valid from October 1999).

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    Article provided by University of Economics, Prague in its journal Politická ekonomie.

    Volume (Year): 1999 (1999)
    Issue (Month): 6 ()
    Pages:

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    Handle: RePEc:prg:jnlpol:v:1999:y:1999:i:6:id:83
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