 |
Economic Review
|
Reserve requirements have traditionally been viewed as a key instrument of monetary policy. Indeed, textbook discussions of monetary policy typically center on the role of reserve requirements in determining the size of the money multiplier and the magnitude of bank credit expansion. In recent years, however, there has been a significant decline in the use of reserve requirements in the United States and in other industrialized countries. Many countries have made substantial cuts in the level of reserve requirements, and some countries have eliminated reserve requirements altogether. The declining use of reserve requirements has two important implications for monetary policy. First, in the absence of a binding level of reserve requirements, the demand for central bank balances is no longer determined by the public's demand for transactions and term deposits but, instead, depends on depository institutions' need to hold balances for clearing and settlement purposes. This means that there is a direct connection between the payments system and monetary policy and implies that institutional changes in the payments system, such as new clearing and settlement methods, may require corresponding changes in monetary policy operating procedures. Second, the absence of binding reserve requirements may lead to increased volatility of short-term interest rates and impair the ability of central banks to implement monetary policy. If so, central banks may have to adapt operating procedures to contain this volatility. In the first of two articles, Sellon and Weiner analyze the implications for monetary policy of the declining use of reserve requirements. The companion article, to be published in a future issue of the Review, will look at three countries that have eliminated reserve requirements Canada, the United Kingdom, and New Zealand and ask whether adaptations to monetary policy procedures in those countries could be extended to the United States. Back to top Economic Review home
In remarks made before the Federal Reserve Bank of Kansas City's 1996 symposium, Achieving Price Stability, Mr. King discussed how quickly a central bank should reduce inflation to its desired level following an inflationary episode. He argued that a central bank is unlikely to wish to move immediately to price stability, since there are costs to disinflation and these costs increase more than proportionally with the rate of disinflation. These costs, which arise because economic agents have to learn about the central bank's commitment to price stability, also mean that a central bank may wish to react to shocks to output as well as to inflation. But Mr. King stressed that any such response should be cautious in the period in which the private sector is still learning about the central bank's commitment to price stability. Back to top Economic Review home
Central banks throughout the world are moving to adopt long-run price stability as their primary goal. Whether operating with multiple short-run goals or legislative mandates for price stability, virtually all central banks have recognized the desirability of achieving price stability over time. Countries with moderate to high inflation are adopting policies to reduce inflation, and countries with low inflation are adopting policies to achieve and maintain price stability. To better understand how central banks can best reduce inflation and what policies and operating procedures should be implemented to maintain price stability, the Federal Reserve Bank of Kansas City sponsored a symposium entitled Achieving Price Stability, held at Jackson Hole, Wyoming, on August 29-31, 1996. The symposium brought together a distinguished group of central bankers, academics, and financial market representatives. Kahn summarizes the papers and commentary presented at the symposium. Participants agreed that low or zero inflation is the appropriate long-run goal for monetary policy. They disagreed, however, about whether a little inflation should be tolerated and what strategies should be adopted to achieve and maintain price stability. Back to top Economic Review home Some analysts and business executives are becoming concerned that recent increases in the consumer debt burden may foreshadow an economic slowdown. Higher debt increases the risk that a household may experience financial distress in the event of an adverse economic shock, such as the loss of a job or large uninsured medical expenses. As the risk of financial distress rises, households may become less willing to spend on consumer goods, particularly big ticket items such as automobiles and home computers, which in turn would hurt economic growth. Different measures of the consumer debt burden are currently giving conflicting signals about the seriousness of the problem. It is not clear whether these measures have been useful indicators of consumer spending and economic growth in the past. Moreover, a measure of the debt burden that was useful in the past might be unreliable today if recent changes in the financial system, such as greater use of credit cards, are distorting the relationship between consumer debt and real economic variables. Garner examines whether various measures of the consumer debt burden can reliably predict a slowdown in economic growth. He concludes that analysts should continue to monitor various measures of the consumer debt burden, but these measures are not highly reliable in predicting future economic slowdowns. Back to top Economic Review home Information about the national economy is typically available well before information about the regional economy. For example, national employment data are usually released about a month before data for individual states, and the state data are often revised subsequently, resulting in a lag of two months or more for accurate information. In addition, output data for the states are released several years after output data for the nation. This lag in economic data makes it difficult for regional policymakers and business planners to gauge current regional economic conditions and to make decisions based on the region's outlook. Moreover, specialized state or regional economic data are often more difficult and costly to obtain than the widely publicized national economic data. If the Tenth District economy closely tracks the national economy, the early national data could give advanced signals about regional economic conditions and perhaps even give clues about the future course of the district economy. Smith explores the relationship between the district and national economies and finds that the district economy generally moves with the national economy. He also finds that information about past changes in the national economy can help predict changes in the district economy. |