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In this paper we investigate how well banks manage their reserves. The optimal policy takes into account expected foregone interest on excess reserves and penalty costs for going below required reserves. Using a unique panel data set on daily clearing house settlements of a cross-section of Mexican banks we estimate the deposit uncertainty banks face, and in turn their optimal reserve behavior. The most important variables in forecasting the deposit uncertainty are the interbank fund-transfers of the day, certain calendar dates, and the interest rate differential between the money market rate and the discount rate--a measure reflecting the bank's opportunity cost of money holdings. For most banks, the model's prediction accord relatively well with the observed reserve behavior of banks. The model produces reserve costs that are significantly smaller relative to the case when reserves are set via a simple rule of thumb. Furthermore, alternative motives for holding reserves (such as liquidity and reputation effects) do not seem to explain why certain banks hold relatively large reserves. [ABSTRACT FROM AUTHOR]

Economists have long believed that, absent any public withdrawals of high-powered money, an unregulated, closed banking system can expand its assets and liabilities without encountering any shortage of reserves so long as its members act in concert. Notwithstanding its popularity, this "in-concert overexpansion" doctrine is inconsistent with standard theories of the precautionary demand for bank reserves. Unless these theories are themselves incorrect, concerns that complete removal of legal restrictions on the competitive supply of bank money must result in an unstable or indeterminate bank-money multiplier are misplaced. [ABSTRACT FROM AUTHOR]

The article discusses money announcements, demand for bank reserves, and the behavior of the U.S. federal funds rate under a lagged reserve accounting economy during the 1980s. Daily changes in the federal funds rate within the statement week may be significantly positive or negative in weekly averages and are serially correlated. This study argues that a money announcement may convey information even if there is no uncertainty about the position of the supply curve for reserves. The model used to determine this point also creates predictable weekly changes in the funds rate.

The 1968 amendment to Regulation D of the Federal Reserve Code permits banks to carry forward one sequential reserve excess or deficiency into the next reserve accounting period. This was intended to reduce the weekly pressure on individual banks to adjust their reserve position. We find, instead, that the carry-forward provision gives individual banks an incentive to alternate weekly between reserve excesses and reserve deficiencies. Thus, the carry-forward provision tends to induce reserve position adjustments even in the absence of changes in the level of deposits. In addition, the carry-forward provision reduces the impact of interest-rate changes on the desired level of excess reserves. [ABSTRACT FROM AUTHOR]

The purpose of this comment (reply) is to point out that Kopecky's argument is based upon a very restrictive interpretation of what it means to impose FRS reserve requirements on nonmember banks and to defend the validity of my test method. Section I presents the most important elements of Kopecky's model (slightly modified by me)—the model which he employs in arguing against my test method. Section II points out the critical assumption upon which Kopecky's argument rests and explains why my test method is valid. Section III contains some final remarks. [ABSTRACT FROM AUTHOR]

The results of most recent econometric studies of the banking sector which employ quarterly data suggest that commercial banks close less than half the gap between their actual and "desired" levels of excess and/or borrowed reserves per quarter. At this rate, the banking system would take a full year to close nine-tenths of the gap. The length of this lag has been regarded as implausible by many researchers. Among the skeptics, many have expressed suspicion of the statistical techniques underlying the estimates. This paper investigates two commonly-proposed statistical sources of bias. The investigation reveals that one of them, temporal data aggregation (averaging over time), does exaggerate the lag. Nonetheless, even after correction for this bias, the estimates indicate a full adjustment period of a quarter or more. The primary purpose this paper is to explain the remaining lag. The major hypothesis of this study is that the lag in the aggregate is caused by lagged interactions among banks in different regions. As this paper demonstrates, when Federal Reserve Member Banks are disaggregated by region, estimated adjustment speeds rise dramatically. Moreover, the lag in the aggregate is well explained statistically by the impact of some regions' reserve adjustments on other regions. The more important of these interregional effects are identifiable and statistically significant, and they are shown to be useful in analyzing the timing of the regional impacts of monetary policy. [ABSTRACT FROM AUTHOR]

Beginning September 12, 1968, a set of changes in Regulation D went into effect, including two major ones which are referred to as the lagged accounting system. One of these sets required reserves in the current period (week) according to deposits two weeks ago, while the other specifies that a bank's "current" reserves consist of current reserve balances on deposit at the Fed and vault cash two weeks ago. It is the object of this paper to examine some implications of these two regulations for the control of the money supply via reserve aggregates. [ABSTRACT FROM AUTHOR]

The article discusses commercial banks and their demand for bank reserve requirements. This research is based on a model that is different from other stochastic methods in that banks are expected to behave differently in regard to how they behave to fluctuations in reserve requirements and how much money banks have available for investing. Bank deposits are treated like random walks and a sample equation is presented of a Bernoulli process for calculating, in dollars, the random walk steps. A set of calculations is presented to demonstrate the expected daily penalty cost, taking into account customer deposits that are in reserve.

The article presents a comparison of the contemporaneous reserve accounting (CRA) and lagged reserve accounting (LRA) methods and the different policies related to both. A theoretical model is used that considers how banks will behave given specific variables like cash in reserve management, the time between bank deposits, money supply, and borrowing by reserve banks. Many calculations are used to demonstrate the uses of CRA and LRA and the actual method for determining the appropriate amount of bank reserves.

This paper develops a simple model of precautionary foreign reserves in a dollarized economy subject to a sudden stop shock that occurs concurrently with a bank run. By including specific features of the Croatian economy in our model we extend the framework of Goncalves (2007). An analytical expression of optimal reserves is derived and calibrated for Croatia in order to evaluate the adequacy of the Croatian National Bank foreign reserves. We show that the precautionary demand for reserves is consistent with the trend of the strong accumulation of foreign reserves over the last ten years. Whether this trend has been too strong or whether the actual reserves are lower than the optimal reserves depends on the possible reaction of the parent banks during a crisis. We show that for plausible values of parameters, the Croatian National Bank has enough reserves to fight a possible crisis of the magnitude of the 1998/1999 sudden stop with a banking crisis episode. This result holds regardless of the parent banks' reaction. We also show how use of the two standard indicators of "optimal" reserves, the Greenspan-Guidotti and the 3-months-of-imports rules, might lead to an unrealistic assessment of foreign reserves optimality in the case of Croatia. [ABSTRACT FROM AUTHOR]

This paper provides a simple, quantitative, net-worth-based approach to assessing the need for central bank capital. It derives a concept of "core capital" (a function of the central bank's operating expenditures and the carrying cost of its international reserves) as the minimum capital needed by a central bank to ensure the credibility of its inflation target. The approach is illustrated with the published accounts of three loss-making central banks and selected accounting entries for a broader sample of central banks. Policy implications are explored. In particular, the paper argues that central bank capitalizations cannot be automatic and require instead a broad policy debate. [ABSTRACT FROM AUTHOR]

The article starts with Haslag's (1998) model of the bank's demand for reserves and reformulates it with a cash-in-advance approach for both financial intermediary and consumer. This gives a demand for a base of cash plus reserves that is not sensitive to who gets the inflation tax transfer. It extends the model to formulate a demand for demand deposits, yielding an Mi-type demand, and then includes exchange credit, yielding an M2-type demand. Based on the comparative statics of the model, it provides an interpretation of the evidence on monetary aggregates. This explanation relies on the nominal interest as well as technology factors of the banking sector. [ABSTRACT FROM AUTHOR]

Describes and constructs a measure of changes in required reserves caused by changes in reserve requirement ratios for the United States from 1929 through 1993. History of adjustment factors; Construction of reserve step index; Comparison of reserve step index (RS) and Saint Louis Federal Reserve Bank's Reserve Adjustment Measure (RAM). INSET: Frost's logarithmic adjustment factor..

Friedman's (1960) proposal to pay interest on (required) reserves is considered in a setting that eliminates the indeterminacy of steady-state equilibrium discussed by Sargent and Wallace (1985). In an overlapping-generations model where the real rate of interest is technologically determined, the payment of interest on reserves results in a determinate, Pareto optimal steady-state equilibrium. However, interest payments on reserves reduce the steady-state welfare of all young agents and, for many economies, result in the existence of stationary sunspot equilibria. This is the case even if such equilibria cannot exist when reserves do not earn interest. [ABSTRACT FROM AUTHOR]

In this paper we developed a stochastic model for determining the optimal stock of international reserves. We derived formally the explicit solution for optimal reserve holdings as a function of the rate of interest, the variance of the stochastic process governing international payments and receipts and the mean rate of net payments. The model was tested empirically under the assumption that on average net payments are zero, and the results were consistent with the predictions of the theoretical model. It should be noted, however, that other empirical studies of the demand for reserves, using different specifications and different time periods, have encountered substantial difficulties in incorporating the rate of interest in the estimated reserve equation (for references see Frenkel (1978)). This might indicate that viewing the rate of interest as the measure of forgone earnings may not be always appropriate. Indeed, our own experiments indicate that the estimated parameters are somewhat sensitive to the specification and to the choice of the time period. Therefore, at the present, we view our empirical results only as suggestive. [ABSTRACT FROM AUTHOR]

Presents a theory of borrowed reserves where deposits are stochastic and banks may fund loans and reserve positions by borrowing at the discount window. Nonlinear relationship between borrowing and the spread between the federal funds rate and the discount rate; Implication for Federal Reserve operating policy in the United States; Problem which the commercial bank solves and where borrowed reserve function is derived.

One may say that an extension of Zecher's model to include a supply of foreign exchange enriches the model without unduly complicating it. Together with the reinterpretation of the effect of interest rates on international reserves, it provides, in my opinion, a more appealing framework to explain international reserve flows in Australia. [ABSTRACT FROM AUTHOR]