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Maybe it's that the standard theory is bunk

There's no "maybe" about that. The "money multiplier" (which is simply the inverse of the reserve requirement) is a completely ex post construct which offers no constraint on private bank lending.

As long as the central bank is targeting an overnight interbank rate via open market operations, reserve requirements (if remunerated at the policy rate) can be set to as high a number as the fraction of (current reserves + acceptable paper for open market operations) to total insured deposits on the private banks' balance sheet. Beyond this point it would lose the ability to conduct open market operations, because the central bank would run out of valid paper to buy, but that is the only reason you can't set reserve requirements to ten million per cent if you wanted to.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 11th, 2011 at 03:07:09 AM EST
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(Well, you might get some Funny effects if you jack reserve requirements higher than 100 % while remunerating reserves, unless you take care to ensure that banks cannot exploit the reserve remuneration with bogus loans.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 11th, 2011 at 03:11:02 AM EST
[ Parent ]
Currently the ECB's reserves are remunerated at the repo rate. Which means that, apart from the haircut, it's free for eligible banks holding eligible assets to satisfy reserve requirements. Which is why tapping the marginal lending facility should be a sign of distress (why pay 2% overnight when you can do a free weekly repo?). By the way, the ECB's reserve requirement is 2% of deposits.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed May 11th, 2011 at 03:54:43 AM EST
[ Parent ]

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