Appendix I: Reserve Requirements in Developing Countries
In this appendix the reserve requirements imposed in a number of developing countries are described. 28/ The descriptions are taken from various sources and discussions with national officials over a number of years (the date is reported in parentheses), so some may no longer be current. Insofar as generalizations can be made based on this sample, it seems that Latin American countries are prone to imposing highly complex reserve requirements. Former British colonies often have a simpler system of reserve requirements, but they tend to have a liquid asset requirement (LAR) in addition. In many countries, nonbank financial institutions (NBFIs) enjoyed low or zero reserve requirements on liabilities that were close substitutes for bank deposits. In several countries measurement of the reserve base and monitoring of compliance was hindered by practical difficulties.
Reserve requirements in the Bahamas (1991) were uniform, at 5 percent of average bank deposits. Both the measurement and the holding period were one month. Unusually, excess reserves at the start of a holding period could be used to offset shortfalls later, but the reverse was not possible. Banks were charged an effective penal interest rate on reserve shortfalls. Reserves were not remunerated, and up to one fifth of the requirement could be satisfied by holdings of vault cash.
Banks in Bangladesh (1993) were formerly required to hold reserves in the form of central bank deposits equal to 10 percent of their deposit liabilities, including gross interbank deposits, and reserve deposits above a 5 percent statutory minimum were remunerated at 5 percent. The requirement is now 5 percent. Some NBFIs that take deposits do not bear any reserve requirements. Measurement of the reserve base is contemporaneous with the one-month holding period, and reserves are to be maintained day to day. Reserve shortfalls bore a penalty interest rate 3 to 5 percentage points above the bank rate.
Reserve requirements on time deposits in Bolivia (1991) were 10 percent, while those on most deposits are 20 percent and some deposits incurred a 100 percent reserve requirement. Measurement and maintenance periods were contemporaneous and followed a two-week cycle, with the “shortfall” measured according to a certain formula (see main text). All reserves on domestic currency liabilities were remunerated, whereas only half of reserves on foreign currency liabilities earned interest.
In Burundi (1992), sight deposits formerly carried a 10 percent reserve requirement, while other bank deposits carried a 5 percent requirement. NBFIs had significant liabilities that were close substitutes for bank deposits but were free of reserve requirements. Requirements were based on end-of-month positions and were to be maintained from mid-month to mid-month on a day-to-day basis. Only deposits with the central bank were eligible assets and they earned no interest. The penalty rate was equal to the refinance rate, so reserve requirements were enforced largely by moral suasion. In 1992 reserve requirements were made uniform and applied to all comparable liabilities of financial institutions, averaging was introduced into the measurement and maintenance of the requirements, and the penalty for noncompliance was set at 8 percentage points above the refinance rate.
Due to the size of the country and poor communications, reserve requirements on banks in China (1991) were calculated by branch at 13 percent of domestic currency deposits (excluding interbank deposits) plus a 5 to 7 percent “additional” or “supplementary” reserves requirement introduced in 1998 to absorb the excess liquidity of some banks. The reserve base was measured, with some lag, on end of month data, though previously different liabilities had different measurement days. Reserves in the form of deposits with the local branch of the central bank had to be held at the end of the month, but the supplementary reserves requirements were frozen. Reserves were remunerated at about 6 percent. Banks were charged a penal interest rate on reserve shortfalls.
In October 1992, the reserve requirement in Costa Rica (1993) on domestic currency demand deposits was raised from 30 to 34 percent, and those on time deposits from 10 to 14 percent; substitutes for bank deposits provided by NBFIs carried low or zero reserve requirements. Short-term foreign currency deposits bear a 20 percent reserve requirement; a 100 percent requirement is applied to long-term foreign currency deposits existing prior to February 1993, and 10 percent on deposits mobilized thereafter. At least 60 percent of reserves on foreign currency deposits earned market rates of interest. The high level of reserve requirements are estimated to add about 3 percentage points to banks’ spreads. Measurement and maintenance were contemporaneous over a half-monthly period. Vault cash and central bank deposits were eligible assets. A bank failing to meet reserve requirements may suffer a denial of central bank refinancing and the suspension of some of its operations.
In Ecuador (1992), demand deposits carried a 32 percent reserve requirement, deposits at the National Development Bank carried a 10 percent requirement, and foreign currency deposits with domestic banks bore a 35 percent requirement, while foreign currency demand deposits with foreign banks and other deposits including those with NBFIs bore an 8 percent requirement. The reserve base was measured weekly. Excess reserves could be “carried over” from period to period, and penalties for reserve shortfalls began after two weeks, as verified by the Superintendency with a lag of two weeks. Banks could use central bank deposits and, to some extent, vault cash to satisfy their reserve requirements, while NBFIs could satisfy them only with central bank deposits. Reserve shortfalls were charged interest at a penal rate (1.5 times the average 90-day lending rate). Previously, a bank which persistently failed to meet its reserve requirement could be prohibited from making new loans until the deficiency was made good.
Until 1990, domestic currency deposits with maturity less than two years attracted a 25 percent reserve requirement in Egypt (1993); because some specialized banks were not subject to reserve requirements, the reserve base constituted approximately 75 percent of all bank deposits. The base was measured and reserves held on a contemporaneous, average, monthly basis, although there was a lag of at least five days in reporting. Reserves were not remunerated, but vault cash was an eligible asset. Since then, banks have been required to deposit the equivalent of 15 percent of all domestic currency deposits with the central bank (specialist banks face a reserve requirement on deposits in excess of their capital and reserves). Reserve deposits, which are not remunerated, must be maintained on an average basis over a week, and the measurement lag is two weeks. The penalty for non-compliance is twice the discount rate. Required reserves of 15 percent on foreign currency deposits must themselves be in foreign currency.
In 1987 the central bank of The Gambia (1992) introduced reserve requirements of 24 percent on demand deposits and 8 percent on term deposits. In addition, there is a 30 percent LAR on all deposits. A bank must satisfy at least 80 percent of its reserve requirements with unremunerated deposits at the central bank, and the rest in vault cash. Reserves are to be maintained on an average basis over two weeks, and the penalty rate is five percentage points above the rediscount rate.
The central bank of Ghana (1992) introduced in 1989 a 30 percent reserve requirement on demand deposits (excluding interbank labilities) and 10 percent on time deposits, resulting in an average requirement of about 22 percent and wide variations between banks. In addition there was a 15 percent LAR. Reserves were to be maintained contemporaneously and day to day, but reserves and the reserve base were measured only once a week. Vault cash and the unremunerated central bank deposits were eligible assets. Reserve shortfalls were charged 0.1 percent interest per day (44 percent per year), and a bank with a persistent shortfall could be prohibited from new lending. Reserve requirements were unified at 22 percent in 1990, and the LAR was raised to 20 percent. In 1991, the reserve requirement was reduced to 18 percent but the LAR increased to 24 percent.
Guinea’s (1993) system of reserve requirements was introduced in February 1991. A bank’s required reserves equal 2 percent of residents’ domestic currency deposits with terms up to three months, plus 5 percent of the difference between short-term credits and 2.5 times medium- and long-term credits. Requirements are based on end-of-month data reported with a two-week lag. The holding period is from mid-month to mid-month. Eligible assets include unremunerated deposits with the central bank and 75 percent of the bank’s vault cash averaged over the previous six months.
Commercial banks in India (1992) were subject to a 15 percent reserve requirement on demand and time liabilities (except for certificates of deposit), a 10 percent marginal requirement having been abolished. A LAR with a 30 percent marginal rate was also in effect. The reserve requirement on cooperative banks was between 3 and 6 percent. The reserve base included interbank liabilities less interbank loans, if the difference was non-negative. The base was measured on a Friday before the start of the two-week holding period, but data were available with a lag of 7 to 10 days. Reserves, in the form of central bank deposits, were to be maintained on an average basis (the LAR was to be maintained day by day). Reserve deposits were remunerated, though the marginal remuneration was zero.
Formerly, most domestic and foreign currency deposits carried a 15 percent reserve requirement in Indonesia (1992). The requirement was only 10 percent on time deposits with state banks, foreign banks and the state development bank, and 5 percent on those with regional development banks. Reserves were calculated on the weekly average of banks’ positions, and the holding period was contemporaneous. At least a third of reserves on domestic currency accounts had to be held as central bank deposits. At least one third of reserves on residents’ foreign currency accounts, and all reserves on nonresidents’ accounts, had to be held as U.S. dollar deposits with the central bank. Required reserves were not remunerated, but, as of 1984, excess domestic currency reserve deposits earned interest at 13 percent, and excess foreign currency reserves earned 10 percent interest. In 1984 the remuneration of excess reserves was eliminated. In 1988 reserve requirements were reduced progressively to 2 percent of all deposits.
Reserve requirements in Jamaica (1992) have been varied as an instrument of monetary policy and reached 25 percent of deposits (their statutory limit), less interbank deposits, averaged over four end-of-week observations. In the early 1980s the system of average maintenance was replaced by a day by day requirement. Requirements had to be fulfilled with central bank deposits. A LAR was also in effect.
Reserve requirements in Kenya (1993) are uniform (currently 8 percent), but important NBFIs were free of requirements. Reserves have to be held day by day, the requirement being determined on the basis of net deposit liabilities measured at the end of the previous month; net deposit liabilities exclude government, nonresident, and export retention account deposits. Vault cash is not an eligible asset, and reserves are not remunerated. Reserve shortfalls are charged 0.1 percent interest per day (44 percent per year), and a bank with a persistent shortfall can be prohibited from new lending. A 20 percent LAR is applied to banks.
Madagascar (1989) operated a system whereby banks had to hold reserves equal to 6 percent of their nonpreferential credit, based on an average of end-of-month stocks, on a day-to-day basis over three months. In addition, they had to hold reserves equal to 20 percent of their average deposits with the central bank over the previous quarter. In November 1990, reserve requirements were redefined as 6 percent of all deposits, measured at the end of each months. Reserves were to be maintained over the second following month, half in a blocked account and half as a daily average.
Surplus reserves could be carried over for one month. The penalty rate equaled the money market rate plus two percentage points, and in addition a bank with a reserve shortfall would have to hold an equal amount of excess reserves next month.
Reserve requirements in Nepal (1993) are 12 percent on deposits. The system was meant to be contemporaneous, but in practice data on the two test dates per month used to verify compliance become available with a lag of six or seven weeks. A penal interest rate is charged on reserve shortfalls. Formerly, the main penalty for noncompliance was a restriction on refinance credit, and at least two thirds of reserves were to be held as central bank deposits.
Nicaragua (1993) operated a highly complex system of reserve requirements prior to December 1992, but enforcement seems to have been poor. Currently, reserve requirements are 10 percent on sight and index linked deposits, and 25 percent on foreign currency deposits. The measurement period is two weeks, and the maintenance period is contemporaneous but verified with a lag of three days. At least two thirds of requirements are to be met with central bank deposits. Reserves are not now remunerated. Up to two periods of shortfall are permitted per quarter, and the penalty rate equals the highest lending rate plus one percent. The penalty rate seems to be too low to enforce compliance.
In Oman (1992), reserve requirements amounted to five percent of all deposits, excluding local interbank deposits. The requirement could be met with central bank deposits, vault cash, and 5 percent of foreign currency deposits with the central bank; this last earned market rates of interest. In addition, up to 3 percentage points of the requirement could be met with interest-bearing treasury bills and development bonds.
Banks in Papua New Guinea (1991) bore a LAR rather than a reserve requirement. Vault cash, reserve deposits and government securities were to equal to 11 percent of all deposits; the base was measured each Wednesday, and assets were to be held day to day from the following Thursday through Wednesday in two weeks.
Paraguay (1993) formerly operated a complex scheme, whereby, for example, sight and savings deposits incurred a marginal reserve requirement of 30 percent, and time deposits had a 20 percent marginal requirement. Verification of compliance was subject to long delays, and the effective penalty was exclusion from the daily clearing. Until 1990, banks were obliged to make 50 percent of loans to priority sectors; a shortfall in lending to priority sectors was to be matched by unremunerated reserve deposits. Currently, reserve requirements are 30 percent on all bank deposits except certificates of deposits, which carry a 15 percent requirement. Deposits mobilized since April 1992 by NBFIs carry a marginal reserve requirement of 30 percent. The penalty rate for noncompliance is 2.5 times the discount rate.
Reserve requirements in Peru (1991) were also complex. Marginal requirements had been brought down from 80 percent in 1990 to 15 percent in March 1991, and the effective requirement on domestic currency deposits fell from 59 percent to 25 percent, while the effective rate on foreign currency deposits is 35 percent. Most interbank deposits were exempt. The measurement period was two weeks, with a two-week lag. Eligible assets comprised central bank deposits, vault cash, and, previously, government bonds. Up to 104 percent of required reserves were remunerated at 4 percent per month on domestic currency reserves, and at LIBOR minus one percent on foreign currency reserves. Foreign cash in vault was remunerated.
Reserve requirements in Sierra Leone (1993) are set at 10 percent of banks’ deposits. Demand deposits also carry a 40 percent LAR, and savings deposits carry a 20 percent LAR. Central bank deposits and vault cash are eligible assets. Reserves and the reserve base are measured on the last business day of the week. The penalty rate is 5 percentage points above the prevailing 91-day treasury bill yield.
Reserve requirements in Sri Lanka (1992) have been altered frequently, and, in practice, have remained well above the 5 percent statutory minimum. Reserve requirements were unified in 1988 at 10 percent of all bank deposits; in mid-1992 they were 12 percent. During 1984-1986, a marginal reserve requirement was in effect. Requirements could be fulfilled by holding unremunerated central bank deposits or, up to a limit, treasury and other bills; vault cash was not an eligible asset after 1977. Shortfalls were penalized at a high rate of interest. During 1991-1992, treasury bills were rendered ineligible, while vault cash was made an eligible asset. Foreign currency deposits, which were formerly excluded, were brought under the requirement in mid-1992.
Reserve requirements were reintroduced in Tunisia (1992) in May 1989. The requirement was set at two percent of deposits, plus some marginal requirements--which were in effect during September 1989-December 1990--, as measured at the end of each month. Reserves, in the form of unremunerated central bank deposits only, were to be held as a monthly average of daily positions.
Banks in Uganda (1992) were obliged to maintain unremunerated central bank deposits equal to 10 percent of their deposits. The 20 percent LAR does not seem to be enforced. Reserve requirements were meant to be contemporaneous, but in practice they were measured and held on a weekly basis with one-week lag. Reserve shortfalls were charged 0.1 percent interest per day (44 percent per year). Reserve requirements have seldom been varied, despite a lack of other monetary policy instruments.
Reserve requirements in Venezuela (1993) were unified at 12 percent in 1990 and extended to cover deposits at all banks and finance houses. Two thirds of required reserves were to be held over a week in a blocked account with the central bank, and one third as cash in vault or deposits in a clearing account. Reserves were not remunerated, and a penalty rate was applied to shortfalls, but enforcement was reported to be intermittent. Shortfalls in the requirement that banks make 22.5 percent of loans to the agricultural sector were penalized by a matching reserve requirement. Reserve requirements were gradually raised to 25 percent during 1990-1991. In September 1992 the central bank introduced a uniform marginal reserve requirement of 15 percent on the change over the August stock of deposits. The increase in reserve requirements for public sector deposits from 15 percent to 80 percent in 1991 was reversed in 1992.
Yugoslavia (1990) had reserve requirements even under the socialist system. Banks were obliged to hold deposits with the central bank equal to 17 percent of demand deposits and 5 percent of other deposits, plus central bank bills equal to 5.5 percent of demand deposits. Many financial sector liabilities, notably those of NBFIs, were free of reserve requirements. The reserve base was measured on three days each month, with a ten-day delay, and reserves were held from the 11th of one month to the 10th of the next. Reserve deposits were remunerated at 30 to 70 percent of the central bank discount rate. Occasional shortfalls were not penalized, and the penalty rate was below the interbank rate.
Appendix II: Remuneration of Reserves and Vault Cash
Most industrialized countries include banks’ cash in vault among eligible assets with which banks can fulfill their reserve requirements. Cash is treated on a par with reserves on deposit with the central bank, as both provide finality of payment. In several countries, however, cash in vault is excluded from eligible assets, sometimes for the purely practical reason that banks’ holdings of cash are difficult to monitor in a timely and verifiable manner.
A number of questions arise concerning the treatment of vault cash. Would its exclusion from eligible assets increase distortions caused by reserve requirements? Or should the opportunity cost of holding vault cash be regarded as a normal business expense which should not be effectively subsidized by treating vault cash as an eligible asset? How would the remuneration of central bank deposits, or vault cash, affect the answers to these questions? Do reserve requirements affect banks differently according to the amount of cash they willingly hold?
Here an attempt is made to answer these questions in a simple way by using a stylized representation of a bank’s profit maximization problem. The analysis is partial equilibrium; in particular, interest rates are taken as given. Therefore, and because the behavior of nonbanks is represented only implicitly, welfare considerations cannot be addressed directly. General questions concerning the optimal quantity of liquid assets go beyond the scope of this note. Also neglected are any questions concerning dynamics, such as the best way to introduce a new or revised reserve requirement.
The bank makes loans (L), holds vault cash (V), and keeps reserve deposits (R) with the central bank. Its liabilities consist of its capital (K) and deposits (D). The bank is a price taker, in the sense that it takes the lending rate iL and the deposit rate iD as given. However, it can attract more deposits by offering better customer services. Holdings of vault cash will be treated as a proxy for the provision of such retail transaction services; the supply schedule for deposits will be written D= D(V) (D’>0). Providing customer services and handling cash is costly, so the bank faces a cost function C = C(V) (C’> 0). 29/ If banks differ in the deposit supply schedules or cost functions that they face, they will be more or less specialized in the provision of retail services.
In addition, the holding of reserves on deposit with the central bank may provide transaction services to the bank, principally by ensuring that “good money” is available immediately as a buffer against fluctuations in inflows and outflows. Because the absolute magnitude of these fluctuations can be expected to vary with the size of the bank’s balance sheet, the value of transaction services is described by a function T(R/D), T’ ≥ 0, T’’ ≤ 0.
Angeloni, I., and A. Prati, “Liquidity Effects and the Determinants of Short-Term Interest Rates in Italy (1991-92),” unpublished mimeo, Bank of Italy (Nov. 1992).
Baltensperger, Ernst, “Reserve Requirements and Economic Stability,” Journal of Money Credit and Banking. Vol. 14 no. 2 (May 1982) pp. 205-215.
Baltensperger, Ernst, “Reserve Requirements and Optimal Money Balances,” Zeitschrift für Wirtschafts- und Sozialwissenschaften (1982) pp.225-236.
Baliño, Tomás J.T., “Instruments of Monetary Policy: Technical Aspects,” paper presented at the 1985 CBD central banking seminar.
Bank of Canada, “The Implementation of Monetary Policy in a System with Zero Reserve Requirements”, Discussion Paper No. 3 (May 1991, Revised September 1991).
Brock, Philip L., “Reserve Requirements and the Inflation Tax,” Journal of Money Credit and Banking Vol. 21 no. 1 (Feb. 1989) pp. 106-121.
Clinton, Kevin, “Bank of Canada cash management: The main technique for implementing monetary policy,” Bank of Canada Review (January 1991).
Coats, Warren L. Jr., “The Use of Reserve Requirements in Developing Countries,” in Warren J. Coats and Deena R. Khatkhate (Eds.), Monetary Policy in Less Developed Countries. Pergamon Press, Oxford (1980).
Dotsey. Michael, “Monetary Control under Alternative Operating Procedures,” Journal of Money Credit and Banking 21 (1989) pp. 273-290.
Espinosa, Marco, “Multiple Reserve Requirements: the Case of Small Open Economies,” Federal Reserve Bank of Atlanta Working Paper 91-12, Nov. 1991.
Freedman, Charles, “Implementation of Monetary Policy,” in Monetary Policy and Market Operations, Bank of Australia, Sydney (1990).
Froyen, Richard T., and Kennneth J. Kopecky, “A Note on Reserve Requirements and Monetary Control with a Flexible Deposit Rate,” Journal of Banking and Finance 7 (1983) pp. 101-109.
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Kaminow, Ira, “Required Reserve Ratios, Policy Instruments, and Money Stock Control,” Journal of Monetary Economics 3 (1977) pp. 389-408.
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McCallum, Bennett T., and James G. Hoehn, “Instruments Choice for Money Stock Control with Contemporaneous and Lagged Reserve Requirements,” Journal of Money Credit and Banking Vol. 15 no. 1 (Feb. 1983) pp. 96-101.
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Daniel C. Hardy is an Economist in the Monetary and Exchange Affairs Department. Many colleagues provided preceptive comments; the author would like to thank in particular Tomás Baliño, Daniel Dueñas, Charles Enoch, Manuel Guitián, Carl Lindgren and V. Sundararajan. All errors are, of course, the responsibility of the author, and the views expressed do not necessarily reflect those of the Fund.
As Fama (1980) puts it, when the government provides a pure nominal commodity, “the problem is to ensure that the nominal commodity… is subject to sufficiently well-defined demand and supply functions to give the unit in which it is measured determinate prices in terms of other goods.” Reserve requirements help define demand for the nominal commodity, base money.
The recommendation of 100 percent reserve requirements under the original “Chicago Plan” was part of a general scheme to separate deposit taking activity from investment financing.
The intervention may be discretionary or rule-based, for example, through a refinance facility that defines a supply schedule of liquidity at increasing interest rates.
It may be easier to think of all variables as defined in terms of deviations from their average values.
Formally, the variance of M diminishes even with ρ greater than 1, that is, a reserve requirement greater than 100 percent. However, as ρ tends to unity, eventually banks will hold less excess reserves (banks would hold no excess reserves when faced with a 100 percent reserve requirement), so ‘a1’ and ‘a2’ will decline as ρ rises until reserve and broad money coincide.
Some central banks have aimed to control bank credit. From the simplified budget constraint M = B + L, where L is bank credit or lending, it follows that L = M - P - ϵ2. Therefore, reserve requirements have the same marginal effect on the variances of L and M--provided that demand for excess reserves and broad money are unchanged across policy regimes.
Independent of ρ, M can be perfectly stabilized by choosing P = ϵ1 - ϵ2 - a2ϵ3/b, that is, by fully accommodating shocks to demand for reserve money, exactly offsetting exogenous shocks to its supply, and counteracting shocks to demand for broad money in a proportion dictated by relative interest elasticities.
Bomhoff (1977) uses simple autocorrelation methods to estimate that the mean absolute error in one-month ahead forecasts of the US multiplier is less than 0.5 percent. Presumably a central bank knows more than last month’s multiplier.
Siegel recommends a 7 percent reserve requirement to minimize price variability in the US.
This is one reason why individual banks may voluntarily hold reserves even if there are no shocks in aggregates.
In a model with interest rate restrictions or informational asymmetries that prevent credit markets from clearing, raising reserve requirements will transfer variance from the money stock to the extent of rationing and the magnitude of distortions.
The cost of under-remunerated reserve requirements may be borne in part by banks’ shareholders if the banks have monopoly profits, but this is not a well- targeted approach to dealing with a lack of competition in the financial sector.
However, central bank profitability will be negatively related to the level of the reserve requirement when the central bank has to issue its own securities to absorb liquidity, because the higher the requirement, the larger the open market sales needed to absorb a given amount of liquidity.
The Supplementary Special Deposit scheme, or “corset,” in force in the U.K. during the 1970s was similar to a marginal reserve requirement. It seems to have induced large-scale disintermediation with little gain in monetary control.
I am thankful to Daniel Dueñas for suggesting this point.
Roley (1986) provides a discussion how operating procedures and lags in the reserve requirement system interact.
Frost (1975) provides a simple model of the determination of excess reserves under a day to day maintenance requirement, and Angeloni and Prati (1992) provide a model of behavior under reserve averaging.
More formally, if the reserve requirement is pD and Ht is a bank’s holdings of eligible assets on some day t, then Ut = min(0, Ht - pD) and Et = max(0, Ht- pD). Since Σ(Ut - αEt) = Σ(Ut - Et) + (1-α)ΣEt, the “average” shortfall under this system equals the usual measure of the bank’s mean position, plus a non-negative term.
However, it is sometimes hard to identify the safe nominal interest rate, in which case a short-term deposit rate might serve as a proxy.
One implication of such a rule is that remuneration may have to be negative if the level of the requirement is low enough.
Much of the literature in this area, such as Romer (1985), assumes that the government can effortlessly set the rate of inflation at its optimum level.
There could still be variations in the multiplier if demand for excess reserves deferred across components of the aggregate.
In equation (2), the term ’i’ could be replaced by the difference between ’i’ and the rate of remuneration. Full remuneration reduces this difference to zero.
The central bank will be able to judge whether estimates are provided in good faith by verifying that average revisions are insignificantly different from zero.
The problem could be reformulated in various ways, for example, by making the bank’s desired cash holdings a function of the deposit base. The cost function specified can be thought of as a reduced form that incorporates also the costs of making loans and taking deposits.
So for instance when the reserve requirement is so high that T’(.) = 0, vault cash holdings and deposits will be unaffected by the reserve requirement when
Since by assumption marginal reserve deposits do not now yield transaction services, they need to be remunerated at a rate above that on loans in order to reduce holdings of vault cash to their unconstrained level.