The Promises and Pitfalls of Contemporaneous Reserve Requirements for the Implementation of Monetary Policy

In October 1979, the Fed acknowledged the potential value of reserve targeting for controlling the money stock and stabilizing the price level. It soon became apparent that the benefits of reserve targeting could not be realized with the lagged reserve requirement rules then in place. Consequently, in June 1982 the Federal Reserve Board decided to move to contemporaneous reserve requirements (CRR). Announcing its intention to change to CRR, the Board said simply that it expected CRR "to improve the implementation of monetary policy to a degree by strengthening the linkage between reserves held by depository institutions and the money supply." This is essentially all the Board has said about the value of CRR for making policy. The benefits of CRR can be more elusive than this statement suggests and more significant as well. This article is intended to point out the promises and pitfalls of CRR for the implementation of monetary policy