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Implementation of Monetary Policy in a Regime with Zero Reserve Requirements

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  • Kevin Clinton

Abstract

Monetary policy can be implemented effectively without reserve requirements as long as cost incentives ensure a predictable demand for settlement balances. A central bank can then achieve the level of short-term interest rates that it desires, using market-oriented instruments only. In Canada, the framework provided by rules on interbank payments settlement and by the costs of deficits and surpluses on settlement accounts provides a strong incentive for the banks and other clearing institutions to target zero balances. Reforms of this framework, to follow the introduction of the Large-Value Transfer System, will ensure its continued effectiveness and make it more transparent. An appendix outlines the process by which reserve requirements were phased out in Canada.

Suggested Citation

  • Kevin Clinton, 1997. "Implementation of Monetary Policy in a Regime with Zero Reserve Requirements," Staff Working Papers 97-8, Bank of Canada.
    • Handle: RePEc:bca:bocawp:97-8
    DOI: 10.34989/swp-1997-8
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    References listed on IDEAS

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    1. Donald Coletti & Benjamin Hunt & David Rose & Robert Tetlow, 1996. "The Bank of Canada's New Quarterly Projection Model. Part 3, the Dynamic Model : QPM," Technical Reports 75, Bank of Canada.
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    Cited by:

    1. Eromenko, Igor, 2002. "Reserve Requirements as Implicit Taxation of Commercial Banks," MPRA Paper 67536, University Library of Munich, Germany.
    2. Amir Kia, 2006. "Economic policies and demand for money: evidence from Canada," Applied Economics, Taylor & Francis Journals, vol. 38(12), pages 1389-1407.
    3. Michael Woodford, 2001. "Monetary policy in the information economy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 297-370.
    4. Morten L Bech & Cyril Monnet, 2013. "The Impact of Unconventional Monetary Policy on the Overnight Interbank Market," RBA Annual Conference Volume (Discontinued), in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.),Liquidity and Funding Markets, Reserve Bank of Australia.
    5. Edwin Le Héron, 2003. "A New Consensus on Monetary Policy?," Post-Print halshs-00159854, HAL.
    6. Nadja Kamhi, 2006. "LVTS, the Overnight Market, and Monetary Policy," Staff Working Papers 06-15, Bank of Canada.
    7. Jeffrey M. Wrase, 1998. "Is the Fed being swept out of (monetary) control?," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-12.
    8. Thibaut Duprey & Yaz Terajima & Jing Yang, 2024. "Interaction of Macroprudential and Monetary Policies: Practice Ahead of Theory," Discussion Papers 2024-18, Bank of Canada.
    9. Bindseil, Ulrich, 1997. "Reserve requirements and economic stabilization," Discussion Paper Series 1: Economic Studies 1997,01e, Deutsche Bundesbank.
    10. William C. Whitesell, 2003. "Tunnels and reserves in monetary policy implementation," Finance and Economics Discussion Series 2003-28, Board of Governors of the Federal Reserve System (U.S.).
    11. Bindseil, Ulrich, 1997. "Die Stabilisierungswirkungen von Mindestreserven," Discussion Paper Series 1: Economic Studies 1997,01, Deutsche Bundesbank.
    12. Thibaut Duprey & Victoria Fernandes & Kerem Tuzcuoglu & Ruhani Walia, 2025. "Effects of macroprudential policy announcements on perceptions of systemic risks," Staff Analytical Notes 2025-4, Bank of Canada.
    13. Michael Woodford, 2000. "Monetary Policy in a World Without Money," International Finance, Wiley Blackwell, vol. 3(2), pages 229-260, July.
    14. Clouse, James A. & Dow, James Jr., 2002. "A computational model of banks' optimal reserve management policy," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1787-1814, September.
    15. Edwin Le Héron, 2004. "From the Canadian Experiment of the 1990's: A New Consensus on Monetary Policy," Post-Print halshs-00159897, HAL.
    16. Morgunov, V.I. (Моргунов, В.И.), 2016. "The Liquidity Management of the Banking Sector and the Short-Term Money Market Interest Rates [Управление Ликвидностью Банковского Сектора И Краткосрочной Процентной Ставкой Денежного Рынка]," Working Papers 21311, Russian Presidential Academy of National Economy and Public Administration.
    17. Yueh-Yun C. O'Brien, 2007. "Reserve requirement systems in OECD countries," Finance and Economics Discussion Series 2007-54, Board of Governors of the Federal Reserve System (U.S.).
    18. Georg Rich, 1997. "Do Central Banks Need Minimum Reserves?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 133(IV), pages 691-708, December.
    19. Mr. Nils O Maehle, 2020. "Monetary Policy Implementation: Operational Issues for Countries with Evolving Monetary Policy Frameworks," IMF Working Papers 2020/026, International Monetary Fund.
    20. Parnell Chu & Grahame Johnson & Scott Kinnear & Karen McGuinness & Matthew McNeely, 2022. "Settlement Balances Deconstructed," Discussion Papers 2022-13, Bank of Canada.
    21. Gordon H. Sellon & Stuart E. Weiner, 1997. "Monetary policy without reserve requirements : case studies and options for the United States," Economic Review, Federal Reserve Bank of Kansas City, vol. 82(Q II), pages 5-30.
    22. Thomas K. Rymes, 2004. "Modern Central Banks Only Have Real Effects," Chapters, in: Marc Lavoie & Mario Seccareccia (ed.), Central Banking in the Modern World, chapter 7, pages 127-143, Edward Elgar Publishing.

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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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