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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: https://www.bankofcanada.ca/wp-content/uploads/2010/05/wp97-8.pdf
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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.
    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 (Discontinued), in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.),Liquidity and Funding Markets, Reserve Bank of Australia.
    2. 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.
    3. Eromenko, Igor, 2002. "Reserve Requirements as Implicit Taxation of Commercial Banks," MPRA Paper 67536, University Library of Munich, Germany.
    4. Bindseil, Ulrich, 1997. "Die Stabilisierungswirkungen von Mindestreserven," Discussion Paper Series 1: Economic Studies 1997,01, Deutsche Bundesbank.
    5. Nadja Kamhi, 2006. "LVTS, the Overnight Market, and Monetary Policy," Staff Working Papers 06-15, Bank of Canada.
    6. 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.
    7. Bindseil, Ulrich, 1997. "Reserve requirements and economic stabilization," Discussion Paper Series 1: Economic Studies 1997,01e, Deutsche Bundesbank.
    8. Michael Woodford, 2001. "Monetary policy in the information economy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 297-370.
    9. 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.).
    10. Michael Woodford, 2000. "Monetary Policy in a World Without Money," International Finance, Wiley Blackwell, vol. 3(2), pages 229-260, July.
    11. Amir Kia, 2006. "Economic policies and demand for money: evidence from Canada," Applied Economics, Taylor & Francis Journals, vol. 38(12), pages 1389-1407.
    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, vol. 82(Q II), pages 5-30.
    14. 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.).

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    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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