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A Simple Model of Voluntary Reserve Targets with Tolerance Bands

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  • GARTH BAUGHMAN
  • FRANCESCA CARAPELLA

Abstract

This paper presents a version of the model of voluntary reserve targets (VRT) developed in Baughman and Carapella (2020) simplified to have a Walrasian instead of frictional interbank market. First, the model makes transparent the role of target setting in controlling the market rate. Second, the simplicity of the model allows for an analysis of the interaction between VRT and tolerance bands, which are a common tool for controlling rate variability. We find that the persistent overshooting of interbank rates observed during the Bank of England's experiment with VRT may derive from the interaction between target setting and tolerance bands, a new explanation relative to the literature. We also suggest a simple remedy.

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  • Garth Baughman & Francesca Carapella, 2023. "A Simple Model of Voluntary Reserve Targets with Tolerance Bands," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(2-3), pages 655-672, March.
    • Handle: RePEc:wly:jmoncb:v:55:y:2023:i:2-3:p:655-672
    DOI: 10.1111/jmcb.12927
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    1. Clouse, James A. & Dow, James Jr., 2002. "A computational model of banks' optimal reserve management policy," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1787-1814, September.
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    6. Garth Baughman & Francesca Carapella, 2020. "Voluntary Reserve Targets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(2-3), pages 583-612, March.
    7. Roc Armenter, 2016. "A Tractable Model Of The Demand For Reserves Under Nonlinear Remuneration Schemes," Working Papers 16-35, Federal Reserve Bank of Philadelphia.
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    1. Francesca Carapella & Jin-Wook Chang & Sebastian Infante & Melissa Leistra & Arazi Lubis & Alexandros Vardoulakis, 2024. "Financial Stability Implications of CBDC," Finance and Economics Discussion Series 2024-021, Board of Governors of the Federal Reserve System (U.S.).

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