Digest Finance

Minimum Reserve Requirements for Commercial Banks: Theory and Practice

Vol. 23, Iss. 1, MARCH 2018

PDF  Article PDF Version

Received: 31 July 2017

Received in revised form: 3 September 2017

Accepted: 10 October 2017

Available online: 30 March 2018

Subject Heading: Financial control

JEL Classification: E58

Pages: 90–97


Sukharev A.N. Tver State University, Tver, Russian Federation

ORCID id: not available

Importance The article examines the rate of reserve requirements as a monetary policy tool.
Objectives I give a more profound theoretical view of the way reserve requirements for commercial banks influence monetary and credit processes.
Methods I rely upon formal logic, systems approach and analysis of statistical data.
Results I specify the macroeconomic mechanism of minimum reserve requirements. In this respect, I give a walk-through example of changes in reserve requirements and their effects on the quantity of cash and non-cash money as part of the central bank’s monetary policy, including inflation targeting. I present my own system of equations for monetary and credit aspects. It helps understand how changes in minimum reserve requirements influence the quantity of both cash and non-cash money in the economy (considering the demand for it).
Conclusions and Relevance Being a monetary policy tool, statutory reserves can be used for microeconomic purposes of the national economy during crises, i.e. supporting the liquidity of the banking system as commercial banks can use them. However, there is a stable correlation between the demand for cash and non-cash money (in the short- and mid-term). Thus, altered minimum reserve requirements induce not only changes in the amount of non-cash money in the economy, but also cash. In this respect, the central bank cannot use the minimum reserve rate as a tool of the monetary policy unless it adjusts the amount of cash money circulating in the economy.

Keywords: central bank, cash, noncash, money supply, reserve requirements, statutory reserve


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