Preliminary Proceedings of the International Conference on Economics, Finance & Business, Berlin

RESERVE REQUIREMENTS AS AN INSTRUMENT OF MONETARY POLICY

PETR MACH

Abstract:

Reserve requirements belong to the portfolio of instruments of many central banks. Although many central banks do not use reserve requirements actively as an instrument of monetary policy, the changes in the reserve requirements affect the volume of deposits, of the money stock and thus of the price level. In this contribution, the effective deposit multiplier that takes into account both the optimal reserve ratio of commercial banks as well as the minimum reserve requirements is formulated and the iteration process is illustrated in which the volume of deposits converges to an equilibrium. It can be argued that once minimum reserves exist, they can be used as an efficient instrument of monetary policy by its gradual decrease leading to a smooth desirable increase in the money stock aimed at maintaining price stability.

Keywords: Reserve requirements. Deposit multiplier. The money stock. Monetary policy.

DOI: 10.20472/EFC.2026.028.004

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