On the Optimality of Reserve Requirements

Richard D Cothren and Roger Waud

Journal of Money, Credit and Banking, 1994, vol. 26, issue 4, 827-38

Abstract: A simple economy is modeled to mimic certain basic characteristics of a monetary economy with agents who trade with one another. The analysis focuses on the way bank reserves affect the return and risk associated with bank investments and how this return and risk affects the extent of trading among agents--that is, the level of economic activity. It is shown how the Nash equilibrium in such a free banking system may yield a suboptimal outcome and how imposition of a reserve requirement can be Pareto improving. Copyright 1994 by Ohio State University Press.

Date: 1994
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Working Paper: On the Optimality of Reserve Requirements (1991)
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