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The promises and pitfalls of contemporaneous reserve requirements for the implementation of monetary policy

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  • Marvin Goodfriend

Abstract

In February of this year, the Federal Reserve Board changed the rules by which banks required reserves are calculated; the previous system of lagged reserve requirements was replaced by contemporaneous reserve requirements (or CRR). According to the Board, the new reserve accounting system will improve the implementation of monetary policy by strengthening the linkage between bank reserves and the money supply. However, according to Marvin Goodfriend, author of The Promises and Pitfalls of Contemporaneous Reserve Requirements for the Implementation of Monetary Policy, the benefits of CRR are not obtainable with operating procedures that target either the Federal funds rate or nonborrowed reserves. Goodfriend presents the case for combining CRR with total reserve targeting. He argues that, compared with Federal funds rate or nonborrowed reserve targeting, a procedure in which total reserves are targeted would minimize the number of difficult economic and political decisions the Fed has to make, protect against pressure to help finance the budget deficit, and make the Feds effort to stabilize the price level both more credible and more effective.

Suggested Citation

  • Marvin Goodfriend, 1984. "The promises and pitfalls of contemporaneous reserve requirements for the implementation of monetary policy," Economic Review, Federal Reserve Bank of Richmond, vol. 70(May), pages 3-12.
    • Handle: RePEc:fip:fedrer:y:1984:i:may:p:3-12:n:v.70no.3
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    References listed on IDEAS

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    Cited by:

    1. Marco A. Espinosa-Vega & Steven Russell, 1990. "The inflationary effects of the use of reserve ratio reductions, or open market purchases, to reduce market interest rates: a theoretical comparison," Working Papers 1990-006, Federal Reserve Bank of St. Louis.
    2. Daniel L. Thornton, 1984. "An early look at the volatility of money and interest rates under CRR," Review, Federal Reserve Bank of St. Louis, vol. 66(Oct), pages 26-32.
    3. Benjamin M. Friedman, 1988. "Targets and Instruments of Monetary Policy," NBER Working Papers 2668, National Bureau of Economic Research, Inc.

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