Modelling Reserve Demand with Deposits and the Cost of Collateral

Laurence Bristow

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: The RBA controls short-term interest rates by offering to lend as many reserves as banks demand at a rate close to its target for monetary policy. At this rate, banks' demand drives the amount of reserves the RBA supplies and subsequently the size of its balance sheet. I estimate a substantial increase in Australian banks' reserve demand since the COVID-19 pandemic. I find an increase in banking system deposits explains a large part of the increase in reserve demand through an associated shift to the right in Australian banks' reserve demand curve. The link between deposits and reserve demand suggests banks are willing to pay for the convenience of holding additional reserves to manage payments between depositors, or that banks hold reserves against deposits as a precaution in case of liquidity stress. The value of collateral also shifts banks' reserve demand curve as it changes the price at which banks can fund reserves through the repo market. The role of collateral in explaining the increase in banks' reserve demand is likely small as its value is little changed since the pandemic.

Keywords: monetary policy; money and interest rates; banks (search for similar items in EconPapers)
JEL-codes: E49 E52 G21 (search for similar items in EconPapers)
Date: 2024-11
New Economics Papers: this item is included in nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.rba.gov.au/publications/rdp/2024/pdf/rdp2024-08.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2024-08

DOI: 10.47688/rdp2024-08

Access Statistics for this paper

More papers in RBA Research Discussion Papers from Reserve Bank of Australia Contact information at EDIRC.
Bibliographic data for series maintained by Paula Drew ().