A mean-variance framework for analyzing reserve requirements and monetary control

This paper analyzes an ‘almost’ contemporaneous reserve accounting system (ACRA) in which reserve computation and maintenance periods only partially overlap. As a result, banks acquire knowledge of their required reserve obligations prior to the settling period when such reserve requirements become legally binding. Our analysis suggests that the money stock behaves similarly under both ACRA and purely contemporaneous reserve accounting systems as long as banks are risk averse. When banks no longer exhibit risk aversion, the ACRA money stock tends to mimic the behavior of the money stock under a lagged reserve accounting system.