Tunnels and Reserves in Monetary Policy Implementation

31 Pages Posted: 10 Sep 2003

See all articles by William C. Whitesell

William C. Whitesell

Federal Reserve Board - Division of Monetary Affairs

Date Written: May 2003

Abstract

In recent years, some central banks have implemented monetary policy without reserve requirements by using a ceiling and floor for overnight interest rates established by central bank lending and deposit facilities. This paper analyzes a theoretical model of such a "tunnel" system and the benefits of adding reserve requirements to it. However, reserve requirements may involve social costs owing to the reserve avoidance activities of banks. The paper also presents a modified model with no reserve avoidance, where banks optimally choose to hold voluntary reserve requirements. The paper highlights the importance for central banks to consider such models in light of idiosyncratic features of their own institutional environment, which may importantly condition the advisability of any particular approach.

Keywords: Monetary policy implementation, reserve requirements, overnight interest reates

JEL Classification: E4, E5

Suggested Citation

Whitesell, William C., Tunnels and Reserves in Monetary Policy Implementation (May 2003). Available at SSRN: https://ssrn.com/abstract=427765 or http://dx.doi.org/10.2139/ssrn.427765

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