Working paper No. 84
By Haydn Davies
If a central bank is unable to forecast accurately the banking system’s demand for reserves, then the volatility of the money-market interest rate is likely to increase. Although reserve averaging is one possible means of dealing with this, positive reserve requirements may have undesirable properties. In this paper, we examine the operational implications of combining averaging with a zero reserve requirement. We then examine the optimum system of penalty charges for overnight overdrafts and for missing the averaging requirement, as well as the consequent behaviour of the money-market interest rate relative to the central bank’s target rate.
Averaging in a framework of zero reserve requirements: implications for the operation of monetary policy