Journal Article

Monetary policy without reserve requirements : case studies and options for the United States

Abstract: Over the past decade, the level of required balances held by depository institutions in the United States has declined dramatically. The decline in reserve balances has fueled a debate over the role of reserve requirements. On the one hand, proponents of reserve requirements argue that low reserve balances may complicate monetary policy operations and increase short-term interest rate volatility. On the other hand, critics of reserve requirements argue that lower reserve requirements remove a distortionary tax on depository institutions and need not complicate monetary policy operations. ; In this article, the authors examine how three countries - Canada, the United Kingdom, and New Zealand conduct monetary policy without using reserve requirements. The experience of these three countries provides insight into the linkages between the payments system and monetary policy and into the connection between reserve requirements and interest rate volatility. This insight is particularly helpful in understanding the implications of a further reduction of reserve balances in the United States.

Keywords: Monetary policy - Great Britain; Monetary policy - New Zealand; Monetary policy; Monetary policy - Canada; Bank reserves;

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Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Economic Review

Publication Date: 1997

Volume: 82

Issue: Q II

Pages: 5-30