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Journal Article
Reserve requirements: A modern perspective
The discussion in many money and banking textbooks would suggest that the Federal Reserve requires depository institutions to hold a minimum level of non-interest-earning reserves because (1) reserve requirements are a monetary policy tool that allows the Fed to expand the money supply and lower interest rates, and (2) reserve requirements improve the safety and soundness of depository institutions. This article argues that this "conventional wisdom" view is too narrow. ; The Fed often uses reserve requirement changes, the authors contend, to achieve non-monetary-policy objectives, as it ...