Implementation of Monetary Policy in a Regime with Zero Reserve Requirements
Bank of Canada Working Paper 97-8
25 Pages Posted: 5 Feb 1998
Date Written: April 1997
Monetary policy can be implemented effectively without reserve requirements as long as cost incentives ensure a predictable demand for settlement balances. A central bank can then achieve the level of short-term interest rates that it desires, using market-oriented instruments only. In Canada, the framework provided by rules on interbank payments settlement and by the costs of deficits and surpluses on settlement accounts provides a strong incentive for the banks and other clearing institutions to target zero balances. Reforms of this framework, to follow the introduction of the Large-Value Transfer System, will ensure its continued effectiveness and make it more transparent. An appendix outlines the process by which reserve requirements were phased out in Canada.
JEL Classification: E42, E52, E58
Suggested Citation: Suggested Citation