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A Positive Model of Reserve Requirements and Interest on Reserves: A Clearinghouse Interpretation of the Federal Reserve System

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  • Mark Toma

Abstract

This paper develops a positive model of reserve requirements and interest on reserves, based on the observation that Congress exempted the Fed from a legal restriction that had prevented private clearinghouses from issuing their own currency. Eliminating the restriction provided the Fed with a source of revenue that could be used to finance general government outlays and to pay implicit interest on reserves. The model implies that the government's financing requirements help explain reserve requirement movements and that interest rates on reserves vary with market loan rates. Cointegration, error‐correction, and Granger‐causality tests provide supporting evidence.

Suggested Citation

  • Mark Toma, 1999. "A Positive Model of Reserve Requirements and Interest on Reserves: A Clearinghouse Interpretation of the Federal Reserve System," Southern Economic Journal, John Wiley & Sons, vol. 66(1), pages 101-116, July.
    • Handle: RePEc:wly:soecon:v:66:y:1999:i:1:p:101-116
    DOI: 10.1002/j.2325-8012.1999.tb00226.x
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    References listed on IDEAS

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    1. Goff, Brian L & Toma, Mark, 1993. "Optimal Seigniorage, the Gold Standard, and Central Bank Financing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 79-95, February.
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    3. Loungani, Prakash & Rush, Mark, 1995. "The Effect of Changes in Reserve Requirements on Investment and GNP," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 511-526, May.
    4. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-140, March.
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    8. Marvin Goodfriend & Monica Hargraves, 1983. "A historical assessment of the rationales and functions of reserve requirements," Economic Review, Federal Reserve Bank of Richmond, vol. 69(Mar), pages 3-21.
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