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The effect of changes in reserve requirements on investment and GNP

  • Prakash Loungani
  • Mark Rush

This paper provides evidence on the importance of the credit channel in the transmission of monetary policy. Changes in reserve requirements are used to measure "credit shocks." Reserve requirement changes are often made for regulatory reasons, and hence provide a more exogenous measure of credit shocks than the measures used in previous tests. To distinguish between the "money" and "credit" channels, the significance of the reserve requirements variable is studied in an empirical model that includes other monetary aggregates (either the monetary base or M1). We find that an increase in reserve requirements lowers aggregate investment, real GNP and commercial and industrial (C&I) loans made by banks.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series, Macroeconomic Issues with number 91-21.

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Date of creation: 1991
Date of revision:
Handle: RePEc:fip:fedhma:91-21
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  1. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  2. Rush, Mark, 1986. "Unexpected Money and Unemployment, 1920 to 1983," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(3), pages 259-74, August.
  3. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
  4. Robert J. Gordon & John Veitch, 1986. "Fixed Investment in the American Business Cycle, 1919-83," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 267-358 National Bureau of Economic Research, Inc.
  5. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
  6. Mark Gertler & R. Glenn Hubbard, 1988. "Financial factors in business fluctuations," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 33-78.
  7. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May.
  8. Mark L. Gertler, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," NBER Working Papers 2559, National Bureau of Economic Research, Inc.
  9. Robert J. Barro & Mark Rush, 1980. "Unanticipated Money and Economic Activity," NBER Chapters, in: Rational Expectations and Economic Policy, pages 23-73 National Bureau of Economic Research, Inc.
  10. Charles I. Plosser, 1989. "Money and business cycles: a real business cycle interpretation," Proceedings, Federal Reserve Bank of St. Louis.
  11. Joseph H. Haslag & Scott E. Hein, 1989. "Reserve requirements, the monetary base, and economic activity," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Mar, pages 1-15.
  12. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-80, June.
  13. G.J. Santoni, 1985. "The monetary control act, reserve taxes and the stock prices of commercial banks," Review, Federal Reserve Bank of St. Louis, issue Jun, pages 12-20.
  14. Loungani, Prakash & Rush, Mark, 1995. "The Effect of Changes in Reserve Requirements on Investment and GNP," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 511-26, May.
  15. Alan S. Blinder & Joseph E. Stiglitz, 1983. "Money, Credit Constraints, and Economic Activity," NBER Working Papers 1084, National Bureau of Economic Research, Inc.
  16. Manchester, Joyce, 1989. "How Money Affects Real Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 16-32, February.
  17. Rush, Mark, 1985. "Unexpected monetary disturbances during the gold standard era," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 309-321, May.
  18. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
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