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October 1984, 
Vol. 66, No. 8
Posted 1984-10-01

An Early Look at the Volatility of Money and Interest Rates under CRR

Daniel L. Thornton examines whether the Federal Reserve’s adoption of a system of contemporaneous reserve requirements (CRR) in February 1983 has had any noticeable effects on the variability of money growth and interest rates. Although CRR was adopted with the expectation that it would reduce the variability of money growth, Thornton points out that there are two reasons why this would not necessarily occur. First, depository institutions may react in ways that reduce the contemporaneous link between reserves and deposits (and, hence, money) under CRR. Second, the October 1982 change in the Federal Reserve's operating procedures may have weakened the contemporaneous relationship between reserves and money; the argument that CRR would reduce the variability in money growth was predicated on the use of a strong reserve aggregate targeting procedure.