Thursday 917

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 10 Money and Prices in the Long Run
Chapter 29 of 36 The Monetary System
Section 17 of 20
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The Fed has three tools for changing the money supply
-1- open-market operations
-2- reserve requirements
-3 - the discount rate
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-2- Reserve Requirements
The Fed can increase and decrease the money supply by changing bank reserve requirements.
These are regulations on the minimum reserves amount banks must hold as a percentage of deposits.
Reserve requirements influence how much money banks can create with each dollar of reserves.
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For example
· if the Fed reserve requirement is 10%
· if people have deposited a total of $100 in a bank
· the bank must keep $10 in reserves
· and can loan out $90
· thereby increasing the money supply by $90
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An increase in reserve requirements means
· banks must hold more reserves
· banks can loan out less of each dollar deposited at them
As a result, it
· lowers the money multiplier
· decreases the money supply
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Conversely, a decrease in reserve requirements means
· banks can hold less reserves
· banks can loan out more of each dollar deposited at them
As a result, it
· raises the money multiplier
· increases the money supply
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The Fed rarely changes reserve requirements because these disrupt banks’ business.
For instance, when the Fed increases reserve requirements
· some banks become short of reserves even though their deposits are unchanged
· banks have to limit lending until they build their reserves to the new required level
… …
it would cause immediate problems
sore wa sokuji no mondai o hikioko
それは即時の問題を引き起
… …
When was the last time the Fed changed reserve requirements? ChatGPT:
The last time the Fed changed reserve requirements was March 26, 2020, when it reduced the required reserve ratios on all transaction accounts to 0%.
This is called an “ample reserves” system.

Immediately before March 26, 2020, the Fed used a tiered system:

⦁ 0% on the smallest amount of transaction deposits
⦁ 3% on the next level up
⦁ 10% on highest level
For larger banks, the effective marginal reserve requirement was 10%.
They have remained at 0% since March 26, 2020.
The change eliminated reserve requirements for all depository institutions and reduced required reserves by an estimated $200 billion.
The Fed said the move would support lending to households and businesses and reflected its earlier shift to an ample-reserves system, in which reserve requirements were no longer important for implementing monetary policy.
There are occasional academic and policy discussions about restoring reserve requirements, but the Federal Reserve currently shows no sign of doing so.