A Public Finance Analysis of Multiple Reserve Requirements

Marco Espinosa-Vega and Steven Russell
Federal Reserve Bank of Atlanta
Working Paper 99-19
December 1999

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This paper analyzes multiple reserve requirements of the type that have been imposed by a number of developing countries. We show that previous theoretical work on this topic has not succeeded in providing a social welfare rationale for the existence of multiple reserve requirements. We go on to present a model in which it is possible for a multiple reserves regime to improve social welfare relative to simpler regimes involving reserve requirements and/or deposit taxes. We demonstrate the empirical plausibility of our approach by providing a case study of Mexico, a country with extensive historical experience with multiple reserve requirements.

JEL classification: E5, E6, F3

Key words: multiple reserve requirements, public finance

This paper is a substantially revised version of Federal Reserve Bank of Atlanta Working Paper 98-1. The authors are grateful for comments from Peter Rangazas and Bruce Smith, from the participants in seminars at the Federal Reserve Bank of Atlanta and the Chinese University of Hong Kong, and from the participants in sessions at the 1996 annual meetings of the Society for Dynamics and the Latin American Econometric Society. In addition, they are indebted to Rodolfo Padilla of the Banco de Mexico for his assistance in providing data for Mexico. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Marco Espinosa-Vega, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, NW, Atlanta, Georgia 30303-2713, 404/498-8630, marco.espinosa@atl.frb.org; or Steven Russell, Department of Economics, 523 Cavanaugh Hall, IUPUI, 425 University Boulevard, Indianapolis, Indiana 46202-5140, shrusse@iupui.edu.