Working Paper
Refine
Year of publication
- 1998 (1)
Document Type
- Working Paper (1) (remove)
Language
- English (1)
Has Fulltext
- yes (1)
Is part of the Bibliography
- no (1)
Keywords
- Reserve requirements (1)
- intermediation (1)
- monetary shocks (1)
- money creation (1)
Institute
- Center for Financial Studies (CFS) (1) (remove)
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 moneyin-advance constraint is universally binding, a 100% reserve requirement on checkable accounts can eliminate this waste.