Defining the adjusted monetary base in an era of financial change

This paper examines how recent changes in the U.S. financial system have affected the appropriate definition, construction and interpretation of the St. Louis adjusted monetary base and adjusted reserves. Since 1990, reductions in statutory reserve requirements have significantly reduced the importance of the requirements as a constraint on the deposit and lending behavior of banks and other depository institutions. During the same period, depositories' interbank payments activities have come to determine most, if not all of their, demand for Federal Reserve Bank deposits. Our analysis suggests that measures of the monetary source base should be broadened to include all Federal Reserve deposits held by domestic depository institutions rather than just those deposits available to satisfy statutory reserve requirements, and that adjustments for the effects of changes in reserve requirements must recognize that many depositories' behavior is not affected by such requirements.