Finance and Economics Discussion Series (FEDS)

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May 2018

Voluntary Reserve Targets

Garth Baughman and Francesca Carapella

Abstract:

This paper updates the standard workhorse model of banks' reserve management to include frictions inherent to money markets. We apply the model to study monetary policy implementation through an operating regime involving voluntary reserve targets (VRT). When reserves are abundant, as is the case following the unconventional policies adopted during the recent financial crisis, operating regimes based on reserve requirements may lead to a collapse in interbank trade. We show that, no matter the relative abundance of reserves, VRT encourage market activity and support the central bank's control over interest rates. In addition to this characterization, we consider (i) the impact of routine and non-routine liquidity injections by the central bank on market outcomes and (ii) a comparison with the implementation framework currently adopted by the Federal Reserve. Overall, we show that a VRT framework may provide several advantages over other frameworks.
Accessible materials (.zip)

Keywords: Monetary policy, Money Markets, Reserve Targets

DOI: https://doi.org/10.17016/FEDS.2018.032

PDF: Full Paper

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Last Update: January 09, 2020