A note on reserve requirements and monetary control with a flexible deposit rate |
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Authors: | Richard T Froyen Kenneth J Kopecky |
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Institution: | University of North Carolina, Chapel Hill, NC 27514, USA;Board of Governers of the Federal Reserve System, Washington, DC 20551, USA |
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Abstract: | This paper examines the relationship between reserve ratios and monetary control when deposit rates are flexible in the short run. For a total reserves operating target, it is shown that an increase in the deposit reserve ration may raise the variance of a monetary aggregate. Under an interest rate operating target, it is also shown that the deposit reserve ratio affects both the expected value and the variance of a monetary aggregate. These findings for the two alternative operating targets differ sharply from previous results which were based on the assumption of fixed deposit rates. |
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