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May 1980

Lagged Reserve Requirements: Implications for Monetary Control and Bank Reserve Management

This article investigates the impact of the timing of reserve accounting on the conduct of monetary policy and on reserve management by individual banks. The author finds that changes in deposit liabilities have no effect in the current week on the reserve positions of banks that clear cheeks through accounts at correspondents. Their required reserves and vault cash portion of reserves are predetermined for the current week, and changes in deposit liabilities do not directly affect their reserve balances in the current week. Therefore, if such a bank begins a settlement week with its reserve balances just equal to required reserve balances, no adjustment of reserve balances is necessary in the current week to avoid excess reserves or deficiencies in response to changes in deposit liabilities.