Market for Reserves

7 Key excerpts on "Market for Reserves"

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  eBook - ePub

  Problems of international Money, 1972-85

  • International Monetary Fund(Author)
  • 1996(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  5 The Role of Reserves in the International Monetary System

  Michael P. Dooley *

  T HE ANALYSIS OF THE ROLE OF RESERVES in the monetary system has generally focused on the demand for reserves. That is, the decisions of individual countries to hold various types of reserve assets and changes in these preferences are seen as affecting prices and economic activity in the world economy. One well-known conclusion of this type of research is that the demand for reserves has apparently not changed significantly in recent years despite very important changes in exchange rate regimes, international capital markets, and a number of other institutional developments.1 The apparent stability in demand for reserves might suggest that the role of reserves in the system has also not changed greatly.

  The argument presented in this paper, however, is that, although the demand for reserves may appear to be little changed, the role of reserves in the current system is fundamentally different because the systemic constraints on the supply of reserves has changed. By concentrating on the demand for reserves, analysts have implicitly assumed that the supply of reserves is determined independently of economic policies of individual countries. As a result, governments’ reactions to an exogenous change in the supply of reserves in part determines the course of important economic variables such as employment and prices. This assumption may have been appropriate under past international monetary arrangements but continued reliance on this assumption can be seriously misleading.

  An alternative framework is based on the assumption that each country faces a schedule that determines the terms under which reserves are supplied to that country. In most cases the relevant supply conditions are the terms on which the country can obtain credit in international financial markets. Thus, reserve holdings are, for most countries, seen as one aspect of an increasingly sophisticated strategy of financial management. This framework also suggests that reserves, per se, play a much more important role in the policies of countries that are effectively excluded from participating in private financial markets. For unconstrained countries, the cost of holding reserves can be compared to the spread between the marginal cost of obtaining credit and the rate of return earned on their reserve assets. For countries with limited or no access to credit markets the cost of obtaining reserves is related to the requirement that their net receipts from goods and services traded with the rest of the world be altered.

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  Reforms in China's Monetary Policy

  A Frontbencher's Perspective

  • Sun Guofeng(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The function of the required reserves system not only lies in creating liquidity deficit, but also lies in stabilizing the demand for reserves. The Monetary Theory ● 49 required reserves systems of developed countries usually assess the reserve ratio requirements according to the average value or the value at the end of a prescribed period. Thus, within the assessment period, the required reserves of commercial banks may briefly fall below the prescribed level and may be used for clearing and cash withdrawal. In this way, at any time other than the end of the assessment period, the required reserve ratio may basically cover the total reserves ratio of commercial banks, and the central bank may accurately calculate and predict the liquidity demand according to the quan- tity of deposits as the basis for assessing required reserves and may therefore effectively control the reserve demand-to-supply ratio. Hence, the required reserves system plays a role similar to that of a “cushion” that absorbs fluc- tuations in liquidity demand for clearing and cash withdrawal and stabilizes total liquidity demand. If required reserves fall below the average level held by commercial banks, they will not be able to stabilize liquidity demand. According to in-depth research conducted by many economists on the relationship between the demand for reserves and money market interest rates (Poole, 1968; Feinman, 1993; Strongin, 1995; Hamilton, 1996, 1997; Bernanke and Mihov, 1998; Furfine, 2000; Woodford, 2000; Meulendyke, 1998), provided that an effective required reserves system is implemented, the central bank can accurately control short-term money market interest rates through short-term trading, and a liquidity management framework of the structural liquidity deficit has been proven to be effective. In China, there is a deep seated misunderstanding about the role of the required reserve ratio and the mechanism by which it has an influence.

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  Central Bank Autonomy

  The Federal Reserve System in American Politics

  • Kevin Corder(Author)
  • 2014(Publication Date)
  • Taylor & Francis

    (Publisher)

  CHAPTER 3 Reserve Requirements and the Distribution of Monetary Restraint

  Reserve requirements specify the percentage of commercial bank liabilities that must be held at the Federal Reserve regional banks in order to meet demands of depositors or other claims against commercial banks. The requirements obligate a financial institution to place funds in a reserve account at a regional Federal Reserve Bank. Since the reserve accounts yield no interest, financial institutions realize no return on bank assets that serve as reserves. Any profits generated by the investment of the contents of these reserve accounts in government securities is held by the Fed, so reserve requirements redistribute revenue from commercial banks to the regional Federal Reserve Banks. Required reserves therefore function as an implicit tax on the financial institutions to which they apply.

  Studies of monetary policy outcomes by political scientists and political economists typically have as a singular focus the extent to which central bank policies expand or contract the aggregate supply of credit and money available to finance economic activity. Indicators of expansion and contraction include aggregate nonborrowed commercial bank reserves, the federal funds rate, and the narrow money aggregate (M1). In this context, reserve requirements are either high (meaning tighter money) or low (meaning easier money). Little attention is given to variation in the scope and definition of required reserves. This omission is surprising given the distributive implications of changes in reserve requirements. Since the structure of reserve requirements determines the distribution of an implicit tax burden across types and classes of financial institutions, changes in reserve requirements are ultimately redistributive choices. It would seem to matter to both commercial bankers and elected officials whether or not, for instance, bank holdings other than deposits at a Federal Reserve Bank can be counted as cash reserves. Banks that routinely hold large amounts of vault cash, at one time characteristic of rural banks, would be disadvantaged if those assets could not be counted as reserves. Since important redistributive effects accompany changes in reserve requirements, these changes should attract considerable attention from members of Congress. Reserve requirements determine what types of financial institutions are most directly affected by monetary restraint and what types of borrowers face the dearest interest rate premiums when monetary policy is tightened. Elected officials are likely to have preferences over how monetary policy is distributed across the economy, so reserve requirements could be a focus of efforts by elected officials to influence monetary policy outcomes. Fed policy makers, reflecting a systematic strategy of avoiding congressional intervention in monetary policy choices, consistently rely on indirect rules and administrative updates (rather than statutory instructions) to manage reserve requirements.

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  Handbook of Monetary Economics vols 3A+3B Set

  • Benjamin M. Friedman, Michael Woodford(Authors)
  • 2010(Publication Date)
  • North Holland

    (Publisher)

  On the supply side of the market, a central bank operating as the Federal Reserve or the BOJ did before 2008 is implicitly committing to intervene as necessary, also on a daily basis, to keep the policy interest rate within some unstated bounds of its target. A central bank operating as the ECB did before 2008 has an explicit commitment to provide or absorb reserves in unlimited quantity at the interest rates on the two standing facilities, together with some presumably lesser (because it occurs only once per week) commitment to intervene within those bounds. A key implication of the resulting interaction, on the assumption that banks understand the central bank's operating system and anticipate its actions, is a daily reserve demand function that depends on the difference between the market rate and the target rate even if the reserve demand is inelastic with respect to the level of either rate. 53 It is this feature that, in effect, gives the central bank the ability to shift the reserve demand schedule as illustrated in Figure 6. The three-asset demand and supply model developed in Section 3 provides a useful way to formalize these relationships. While the resulting model does not incorporate many of the complexities and unique features of individual central banks' operating frameworks, it nonetheless captures the essential features that give rise to the anticipation effect. The key point is that, because the reserve requirement applies not to each day separately but on average over the maintenance period, banks' demand for reserves on day t depends not only on the current configuration of interest rates, as in Eq. (3), but also on the expected future rate for borrowing or lending reserves

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  Payment Systems in Global Perspective

  • Maxwell J. Fry(Author)
  • 1999(Publication Date)
  • Taylor & Francis

    (Publisher)

  Chapter 5Reserve Requirements, Liquidity and Risk

  5.1Introduction

  IN RECENT YEARS, REQUIRED RESERVES have been reduced or eliminated in many countries, particularly transitional economies, to remove resource allocation distortions and to counteract financial disintermediation. For example, the ratio of bank reserves to bank deposits fell from over 50 percent to under 20 percent in Estonia, 1991–1996, from 25 to 15 percent in Lithuania, 1993–1995, from 35 to 10 percent in Poland, 1988–1996, from 26 to 18 percent in Russia, 1993–1996, and from 80 to 18 percent in the Ukraine, 1992–1997 (International Financial Statistics, CD-ROM, March 1997).

  To the extent that required reserves can be used during the day for payment purposes, they provide a costless source of liquidity. But noninterest-earning required reserves impose negative effective protection on a country's financial system so encouraging residents to use cheaper financial intermediation services abroad. International competition is therefore forcing monetary authorities to reduce the burden of reserve requirements either by lowering ratios or by paying interest on such reserves. At the same time, RTGS systems have been introduced in many industrial, transitional and developing countries both to eliminate settlement risk from high-value payment systems and to reduce moral hazard.

  These two tendencies create potential friction: the former diminishes demand for reserves to be kept overnight and the latter increases demand for reserves during the day. This conflict may encourage banks to spend too much effort from the social welfare viewpoint in managing their reserves. This chapter describes and discusses ways of dealing with these opposing forces, particularly as they apply to transitional and developing countries.

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  Federal Reserve Policy Reappraised, 1951–1959

  • Daniel S. Ahearn(Author)
  • 2019(Publication Date)
  • Columbia University Press

    (Publisher)

  20 In less colorful language, Riefler's testimony in 1958 before the British Radcliffe Committee painted much the same picture. Riefler said it would only be in peculiar circumstances that we could raise reserve requirements. Under the free market technique, any announcement of a rise in reserve requirements would mean that buying in the Government securities market would dry up, and we would have to go in and sup-port the market, which we would not want to do, so it is very difficult. 21 Moreover, the Federal Reserve argued, it is unnecessary to subject the economy to the drastic effects of reserve requirement increases be-cause the problem of the monetary authorities in a boom is not one of contracting the size of the reserve base but simply of slowing its rise. Hence, unless redundant excess reserves remain from the preceding pe-riod of ease or there is a substantial inflow of reserves from other sources, a restrictive policy does not require that bank reserves be ab-sorbed but simply that they be held stable or allowed to increase at a slower rate. 22 This policy can be well served by conducting open market opera-tions to provide fewer reserves than normal for seasonal and growth needs. The result is a gradually mounting pressure on the banking system which is felt individually and gradually by the member banks through the operation of market forces. For example, sales of securi-ties in the open market may be reflected in withdrawals of deposits at some banks by customers. 23 As Goldenweiser put it: This sort of transaction is familiar to the bank; some withdrawals of de-posits occur all the time and other deposits are made; if the net is a loss 17 The Open Market Committee offset purchases of long-terms with sales of short-term Government securities to the maximum extent possible whenever it had to make support purchases. 18 Joint Committee, 1959 Employment Hearings, Pt. 6A, p.

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  Introduction to Finance

  Markets, Investments, and Financial Management

  • Ronald W. Melicher, Edgar A. Norton(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  The Treasury carries out its debt management policy by operating in a “regular and predictable” manner to mini- mize disruption in the financial markets and to support fiscal and monetary policies. LO 5.6 The U.S. banking system is a fractional reserve system where depository institutions must hold funds at their regional Reserve Banks equal to a certain percentage of their deposit liabilities. Since an individual depository institution is required to hold only a portion of its deposits as reserves, the remaining funds from a new deposit can be lent to borrowers who, in turn, may deposit the funds they receive in the same or another bank in the banking system, and so forth. An estimate of the potential change in check- able deposits, a component of the M1 money supply, can be made by dividing the amount of an increase (or decrease) in excess reserves by the required reserves ratio. LO 5.7 The factors or transactions that affect bank reserves include changes in the demand for currency by the nonbank public; Fed trans- actions, such as changes in the required reserves ratio, open-market operations, and changes in bank borrowings; and U.S. Trea- sury actions involving changes in Treasury spending from its accounts held at Reserve Banks and changes in its cash holdings. LO 5.8 The monetary base consists of banking system reserves plus currency held by the public, while the money multiplier is the number of times the monetary base can be expanded to produce a money supply level. Multiplying the monetary base times the money multi- plier produces the amount of the M1 money supply. The velocity of money is the average number of times each dollar is spent on pur- chases of goods and services. By dividing nominal gross domestic product by M1 pro- duces a measure of the velocity of money.

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