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On the Optimality of Reserve Requirements

Listed author(s):
  • Richard D. Cothren
  • Roger N. Waud

An implicit rationale for a bank reserve requirement is that a central monetary authority is in a unique position (as "social planner) to impose a "socially superior" outcome to that yielded by a free banking system. We illustrate how this can be true in the context of a simple economy modeled to mimic certain basic characteristics of a monetary economy with banks and agents who trade with one another. Banks exist in our model because by pooling liquidation risks they provide liquidity otherwise unavailable to depositors, which, in turn, provides the incentive - for using deposit claims as the medium of exchange.

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File URL: http://www.nber.org/papers/t0101.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0101.

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Date of creation: Apr 1991
Publication status: published as Cothren, Richard D. and Roger N. Waud. "On The Optimality Of Reserve Requirements," Journal of Money, Credit and Banking, 1994, v26(4), 827-838.
Handle: RePEc:nbr:nberte:0101
Note: ME
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  1. Polemarchakis, H. M. & Weiss, L., 1977. "On the desirability of a "totally random" monetary policy," Journal of Economic Theory, Elsevier, vol. 15(2), pages 345-350, August.
  2. King, Robert G., 1983. "On the economics of private money," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 127-158.
  3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  4. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
  5. Lucas, Robert Jr., 1977. "Reply to muench and polemarchakis and weiss," Journal of Economic Theory, Elsevier, vol. 15(2), pages 351-352, August.
  6. Rolnick, Arthur J & Weber, Warren E, 1983. "New Evidence on the Free Banking Era," American Economic Review, American Economic Association, vol. 73(5), pages 1080-1091, December.
  7. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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