| Abstract: | This paper studies movements in the ratio of free liquid reserves of West German commercial banks to total deposits over the period 1960–1980. The desired ratio is assumed to depend positively on the ‘own yield’, measured by recently experienced variance of the required-reserve ratio (a proxy for portfolio adjustment costs avoided by holding free reserves), and negatively on the yield on alternative assets. The observed free reserve ratio also responds to changes in the Bundesbank's holdings of foreign exchange and net government deposits. Empirical tests on quarterly data support the hypothesis, though behavioral shifts occured in 1966 and 1973. |
