The real effects of reserve requirements

  • We review arguments for and against reserve requirements and conclude that the main question is whether a distinction between money creation and intermediation can be made. We argue that such a distinction can be made in a money-in-advance economy and show that if the money-in-advance constraint is universally binding then reserve requirements on checkable accounts have no effect on intermediation. We then proceed to show that in a model in which trade is uncertain and sequential, a fractional reserve banking system gives rise to endogenous monetary shocks. These endogenous monetary shocks lead to fluctuations in capacity utilisation and waste. When the money-in-advance constraint is universally binding, a 100% reserve requirement on checkable accounts can eliminate this waste.

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Author:Benjamin Bental, Benjamin Eden
Publisher:[Verlag nicht ermittelbar]
Place of publication:[Erscheinungsort nicht ermittelbar]
Document Type:Report
Date of Publication (online):2006/08/25
Year of first Publication:1998
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2006/08/25
Tag:Intermediation; Monetary Shocks; Money Creation; Reserve Requirements
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoArchivex. zur Lesesaalplatznutzung § 52b UrhG