Portal Red Investigadores de Economía

General

The use of reserve requirements as a key instrument of monetary policy has declined because of a change in the way that central banks implement its policy. In recent years, many central banks have shifted their intermediate target from monetary aggregates to short-term interest rates. However, in certain circumstances, some of them, which have an interest-rate strategy, use reserve requirements to control the creation of money. This paper analyzes theoretically the effect of a reserve requirements policy on market interest rates and bank credit under a monetary strategy of short-term interest rates. The model suggests that this effect depends on the existence of uncertainty about the future policy interest rate, and thus on the risk that commercial banks have to face when the maturity of its loans and deposits is different to the maturity of the short-term credit with the central bank.

Reserve Requirements and Interest Rates [Encajes bancarios y tasas de interés]