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The Demand for Excess Reserves in the Euro Area and the Impact of the Current Credit Crisis

  • Fátima Teresa Sol Murta


    (Faculdade de Economia/GEMF, Universidade de Coimbra)

  • Ana Margarida Garcia

    (Faculdade de Economia, Universidade de Coimbra)

One of the risks that banks need to manage, in their financial intermediation activities, is liquidity risk. Thus, banks hold reserves for precautionary reasons, in order to keep enough cash to meet their obligations. In this work, we analyze the demand for excess reserves by Euro Area banks, since the change in the framework of the single monetary policy in March 2004. Our main conclusions are that there is a positive relationship between the demand for reserves and its financing cost and also that the environment of uncertainty present in the credit crisis is not significant in the demand for excess reserves: the ECB achieved control over the money market tensions.

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Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2010-01.

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Length: 32 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:gmf:wpaper:2010-01
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  1. Nautz, Dieter, 1998. "Banks' demand for reserves when future monetary policy is uncertain," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 161-183, June.
  2. Baltensperger, Ernst, 1980. "Alternative approaches to the theory of the banking firm," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 1-37, January.
  3. Clouse, James A. & Dow Jr., James P., 1999. "Fixed costs and the behavior of the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1015-1029, July.
  4. Baltensperger, Ernst, 1974. "The Precautionary Demand for Reserves," American Economic Review, American Economic Association, vol. 64(1), pages 205-10, March.
  5. Donald S. Allen, 1998. "How closely do banks manage vault cash?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 43-54.
  6. Claudio E. V. Borio, 1997. "Monetary policy operating procedures in industrial countries," BIS Working Papers 40, Bank for International Settlements.
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