The Evolving Role of Reserve Requirements in Monetary Policy

Abstract

The design of monetary policy has been a subject of debate in the specialized literature. Over the last three decades, this literature has moved from questioning the very existence of reserve requirements (RRs) to analyzing and discussing their role as a tool for monetary policy. The large variation in how central banks implement RRs around the world suggests that a consensus has yet to emerge on what constitutes an optimal reserve requirement strategy. I survey the main modeling strategies which incorporate RRs in the design of monetary policy. Furthermore, I discuss different modeling approaches in which RRs can affect the banking system, improve monetary policy decisions, and help achieve a central bank’s macroeconomic objectives.