Discussion of “Reserve Requirements for Price and Financial Stability: When Are They Effective?”∗

Since the onset of the 2008 financial crisis, many economists have studied the effects of unconventional monetary policies such as credit-easing policies or actions aimed at altering the maturity structure of the private sector’s asset holdings. But surprisingly, there has been relatively little work on one of the traditional policy tools of a central bank—required reserve ratios—and how required reserves might be used as a cyclical policy instrument. Christian Glocker and Peter Towbin fill this gap by employing a modern dynamic stochastic general equilibrium (DSGE) model of a small open economy to analyze the use of reserve requirements as a tool for cyclical stabilization. At one time, we all learned that central banks had three policy instruments—the quantity of non-borrowed reserves, the interest rate charged on discount window borrowing, and the required reserve ratio. The first two instruments operated by affecting the supply of bank reserves; the third worked by affecting the demand for reserves. Then, many central banks adopted a short-term interbank rate as their primary policy instrument. Doing so made the quantity of non-borrowed reserves an endogenous variable, adjusting to ensure reserve supply and demand were consistent with the policy interest rate. Under such a policy regime, the discount rate and reserve requirement became irrelevant. Of course, this wasn’t (and isn’t) true of developing economies. There, central banks continued to