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Averaging in a framework of zero reserve requirements: implications for the operation of monetary policy

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  • Haydn Davies

Abstract

If a central bank is unable to forecast accurately the banking system's demand for reserves, then the volatility of the money-market interest rate is likely to increase. Although reserve averaging is one possible means of dealing with this, positive reserve requirements may have undesirable properties. In this paper, we examine the operational implications of combining averaging with a zero reserve requirement. We then examine the optimum system of penalty charges for overnight overdrafts and for missing the averaging requirement, as well as the consequent behaviour of the money-market interest rate relative to the central bank's target rate.

Suggested Citation

  • Haydn Davies, 1998. "Averaging in a framework of zero reserve requirements: implications for the operation of monetary policy," Bank of England working papers 84, Bank of England.
    • Handle: RePEc:boe:boeewp:84
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1998/wp84.pdf
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    References listed on IDEAS

    as
    1. Spindt, Paul A. & Hoffmeister, J. Ronald, 1988. "The Micromechanics of the Federal Funds Market: Implications for Day-of-the-Week Effects in Funds Rate Variability," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(4), pages 401-416, December.
    2. Stuart E. Weiner, 1992. "The changing role of reserve requirements in monetary policy," Economic Review, Federal Reserve Bank of Kansas City, vol. 77(Q IV), pages 45-63.
    3. Joshua N. Feinman, 1993. "Reserve requirements: history, current practice, and potential reform," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 569-589.
    4. William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
    5. Gordon H. Sellon & Stuart E. Weiner, 1996. "Monetary policy without reserve requirements: analytical issues," Economic Review, Federal Reserve Bank of Kansas City, vol. 81(Q IV), pages 5-24.
    6. Escriva, J.L. & Fagan, F.P., 1996. "Empirical assessment of Monetary Policy Instruments and Procedures (MPIP) in EU Countries," Papers 2, European Monetary Institute.
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    Cited by:

    1. Anne Vila Wetherilt, 2003. "Money market operations and volatility of UK money market rates," Bank of England working papers 174, Bank of England.
    2. Anne Vila Wetherilt, 2003. "Money market operations and short-term interest rate volatility in the United Kingdom," Applied Financial Economics, Taylor & Francis Journals, vol. 13(10), pages 701-719.
    3. Nicolas Couderc, 2005. "Réserves obligatoires : un état des lieux," Revue d'Économie Financière, Programme National Persée, vol. 78(1), pages 363-380.
    4. Nikolaos Panigirtzoglou & James Proudman & John Spicer, 2000. "Persistence and volatility in short-term interest rates," Bank of England working papers 116, Bank of England.

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