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Asset-based reserve requirements: reasserting domestic monetary control in an era of financial innovation and instability

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  • Thomas Palley

Abstract

This paper argues for developing a new system of financial regulation based upon asset-based reserve requirements (ABRRs). Such a system represents a shift in regulatory focus away from the traditional concern with the liability side of financial intermediaries' balance sheets. ABRRs have both significant macroeconomic and microeconomic advantages. At the macroeconomic level, they can provide policy makers with additional policy instruments. This is particularly useful in light of recent concerns about the dangers of asset price inflation and the potential need to target asset prices. They can also help restore the traction of monetary policy at a time when banks are becoming a smaller part of the financial landscape. At the microeconomic level, they can be used to discourage excessive risk taking by financial intermediaries. Finally, they can also raise considerable seignorage. To be fully effective, a system of ABRRs should be applied to all financial intermediaries.

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  • Thomas Palley, 2004. "Asset-based reserve requirements: reasserting domestic monetary control in an era of financial innovation and instability," Review of Political Economy, Taylor & Francis Journals, vol. 16(1), pages 43-58.
    • Handle: RePEc:taf:revpoe:v:16:y:2004:i:1:p:43-58
    DOI: 10.1080/0953825032000145454
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    References listed on IDEAS

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    1. Thomas Palley, 1999. "End of the Expansion: Soft Landing, Hard Landing, or Even Crash?," Challenge, Taylor & Francis Journals, vol. 42(6), pages 6-25, November.
    2. Benjamin M. Friedman, 2000. "The Role of Interest Rates in Federal Reserve Policymaking," NBER Working Papers 8047, National Bureau of Economic Research, Inc.
    3. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
    4. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, April.
    5. Benjamin M. Friedman, 2000. "The role of interest rates in Federal Reserve policymaking," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 45(Oct), pages 43-66.
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