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A public finance analysis of multiple reserve requirements

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  • Marco A. Espinosa-Vega
  • Steven Russell

Abstract

This paper analyzes multiple reserve requirements of the type that have been imposed by a number of developing countries. We show that previous theoretical work on this topic has not succeeded in providing a social welfare rationale for the existence of multiple reserve requirements. We go on to present a model in which it is possible for a multiple reserves regime to improve social welfare relative to simpler regimes involving reserve requirements and/or deposit taxes. We demonstrate the empirical plausibility of our approach by providing a case study of Mexico, a country with extensive historical experience with multiple reserve requirements.

Suggested Citation

  • Marco A. Espinosa-Vega & Steven Russell, 1999. "A public finance analysis of multiple reserve requirements," FRB Atlanta Working Paper 99-19, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:99-19
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    References listed on IDEAS

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    1. Neil Wallace, 1984. "Some of the choices for monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
    2. Sargent, Thomas & Wallace, Neil, 1985. "Interest on reserves," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 279-290, May.
    3. Bruce D. Smith, 1991. "Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 93-105.
    4. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
    5. Freeman, Scott, 1987. "Reserve requirements and optimal seigniorage," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 307-314, March.
    6. Neil Wallace, 1983. "A legal restrictions theory of the demand for "money" and the role of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
    7. Mourmouras, Alex & Russell, Steven, 1992. "Optimal reserve requirements, deposit taxation, and the demand for money," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 129-142, October.
    8. Thomas J. Sargent & Neil Wallace, 1981. "The real bills doctrine vs. the quantity theory: a reconsideration," Staff Report 64, Federal Reserve Bank of Minneapolis.
    9. Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, vol. 83(4), pages 953-963, September.
    10. Marco A. Espinosa-Vega & Steven Russell, 1998. "A public finance analysis of multiple reserve requirements," FRB Atlanta Working Paper 98-1, Federal Reserve Bank of Atlanta.
    11. Romer, David, 1985. "Financial intermediation, reserve requirements, and inside money: A general equilibrium analysis," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 175-194, September.
    12. Joseph H. Haslag & Joydeep Bhattacharya, 1999. "Seigniorage in a neoclassical economy: some computational results," Working Papers 9901, Federal Reserve Bank of Dallas.
    13. Bruce D. Smith, 1984. "Money and inflation in colonial Massachusetts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
    14. Espinosa-Vega, Marco A. & Russell, Steven, 2001. "Are There Optimal Multiple-Reserve Requirements?," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 85-104, January.
    15. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1212-1236, December.
    16. Espinosa-Vega, Marco A, 1995. "Multiple Reserve Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 762-776, August.
    17. Richard D. Porter & Ruth Judson, 1996. "The location of U.S. currency: how much is abroad?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 883-903.
    18. Freeman, Scott & Haslag, Joseph H, 1996. "On the Optimality of Interest-Bearing Reserves in Economies of Overlapping Generations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(3), pages 557-565, April.
    19. de Paso, Jose I. Garcia, 1997. "Multiple reserve requirements: an irrelevance result," Economics Letters, Elsevier, vol. 56(3), pages 333-338, November.
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    Cited by:

    1. Marco A. Espinosa-Vega & Steven Russell, 1998. "A public finance analysis of multiple reserve requirements," FRB Atlanta Working Paper 98-1, Federal Reserve Bank of Atlanta.
    2. Patrick Honohan, 2003. "Taxation of Financial Intermediation : Theory and Practice for Emerging Economines," World Bank Publications, The World Bank, number 15122, April.

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    Keywords

    Finance; Public ; Developing countries ; Mexico ; Bank reserves;

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