Title

Reserve Ratios: A Proposal For Change

Comments

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Abbreviated Journal Title

J. Macroecon.

Keywords

Economics

Abstract

The paper addresses the problem of Fed control of the money supply and the inherent instability of a fractional reserve banking system which Friedman covered in A Program for Monetary Stability. While Friedman proposed a 100 percent reserve requirement as a solution, this work suggests a change from imposing legal reserve ratios on specific liabilities to one of imposing them on total bank liabilities. Reserve ratios are compared to tax rates. Friedman's proposal is to increase the tax rate to 100 percent on specific liabilities and pay interest on reserve balances at the Fed. The proposal of this paper is to keep the tax rates (present reserve ratios) but change the tax base. It is shown that the Fed would gain control over the maximum expansion of banks, but would lose direct control over specific liabilities. The Fed would not tax some liabilities and subsidize others. The Fed could concentrate on setting the tone of the money market and allow the public to use whatever set of bank liabilities it desires as money without specific penalty.

Journal Title

Journal of Macroeconomics

Volume

8

Issue/Number

4

Publication Date

1-1-1986

Document Type

Article

Language

English

First Page

479

Last Page

484

WOS Identifier

WOS:A1986G772300007

ISSN

0164-0704

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