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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
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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/05/wp97-8.pdf
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    References listed on IDEAS

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    1. Coletti, D. & Hunt, B. & Rose, D. & Tetlow, R., 1996. "The Bank of Canada's New Quarterly Projection Model. Part 3 , the Dynamic Model : QPM," Technical Reports 75, Bank of Canada.
    2. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January.
    3. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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    Cited by:

    1. Morten L Bech & Cyril Monnet, 2013. "The Impact of Unconventional Monetary Policy on the Overnight Interbank Market," RBA Annual Conference Volume,in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.), Liquidity and Funding Markets Reserve Bank of Australia.
    2. Amir Kia, 2002. "Demand for Money, Economic Policies, and Stability," Emory Economics 0211, Department of Economics, Emory University (Atlanta).
    3. 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.
    4. Eromenko, Igor, 2002. "Reserve Requirements as Implicit Taxation of Commercial Banks," MPRA Paper 67536, University Library of Munich, Germany.
    5. Amir Kia, 2006. "Economic policies and demand for money: evidence from Canada," Applied Economics, Taylor & Francis Journals, vol. 38(12), pages 1389-1407.
    6. Nadja Kamhi, 2006. "LVTS, the Overnight Market, and Monetary Policy," Staff Working Papers 06-15, Bank of Canada.
    7. Bindseil, Ulrich, 1997. "Die Stabilisierungswirkungen von Mindestreserven," Discussion Paper Series 1: Economic Studies 1997,01, Deutsche Bundesbank.
    8. 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.
    9. Bindseil, Ulrich, 1997. "Reserve requirements and economic stabilization," Discussion Paper Series 1: Economic Studies 1997,01e, Deutsche Bundesbank.
    10. Michael Woodford, 2001. "Monetary policy in the information economy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 297-370.
    11. 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 (US).
    12. 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.
    13. 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, issue Q II, pages 5-30.
    14. Woodford, Michael, 2000. "Monetary Policy in a World without Money," International Finance, Wiley Blackwell, vol. 3(2), pages 229-260, July.
    15. 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 (US).

    More about this item

    Keywords

    Monetary policy implementation;

    JEL classification:

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

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