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A Positive Model of Reserve Requirements and Interest on Reserves: A Clearinghouse Interpretation of the Federal Reserve System
Author(s) -
Toma Mark
Publication year - 1999
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.1999.tb00226.x
Subject(s) - reserve requirement , economics , bank reserves , excess reserves , interest rate , loan , cointegration , currency , revenue , government (linguistics) , monetary economics , finance , monetary policy , central bank , econometrics , linguistics , philosophy
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.