The reserve requirement system is that whereby financial institutions are obliged to hold a certain ratio of their liabilities subject to reserve requirements (reserve requirement ratio) in their accounts with the central bank. The central bank can adjust liquidity in the markets and promote financial stability by changing financial institutions' funding situation through adjustment of the reserve requirement ratios. For example, since raising the reserve requirement ratios causes banks to deposit more money as their required reserves, their capacity to provide loans and purchase securities is reduced, thus leading to a decline in the volume of money in circulation. Consequently, liquidity is reduced and the possibility of financial unrest arising from an excessive increase in lending can be averted. Show
Reserve requirements are still regarded as an important monetary policy tool in a number of major countries including Korea, although used less frequently than in the past as the monetary base-focused orientation of monetary policy has shifted to an interest rate-focused orientation around the world from the 1980s. This is ascribable to its great usefulness in that it not only ensures seamless payments and settlements among financial institutions across their checking accounts with the central bank by having them hold a certain proportion of their reserves in the accounts, but it also enhances the efficiency of interest rate policy by stabilizing short-term market rates*. The financial institutions subject to the current reserve requirement regime include commercial banks and specialized banks. These institutions are required to maintain reserves corresponding to their reserve requirement ratios differentiated within a range between 0~7% depending upon their deposit liability types**. Meanwhile, under the revised Bank of Korea Act, from December 17, 2011*** reserve requirements can be imposed on some types of bank debentures as well as the existing deposit liabilities. Financial institutions should maintain the required reserve in the Bank of Korea in the form of current deposits, but they may hold up to 35% of their reserves in the form of vault cash consisting of banknotes of the Bank of Korea. * Financial institutions' maintenance of reserve requirement deposits brings greater stability to interest rates in the interbank short-term trading market (call market) than would otherwise be the case by reducing the demand for borrowing of funds for payment and settlement. ** The Monetary PolicyBoard may determine reserve requirement ratios within a range not exceeding 50% for different types or scales of liabilities subject to reserve requirements. In periods of pronounced monetary expansion, however, the Monetary Policy Board may impose marginal reserve requirements of up to 100% against any increase in liabilities subject to reserve requirements above the amount outstanding as of the date specified, thus making financial institutions maintain additional required reserves. *** Reserve requirements may be imposed on the following Korean won denominated bank debentures whose maturity is less than 2 years: In periods of pronounced or likely monetary expansion, bank debentures issued by commercial banks during the periods deemed necessary to accumulate more reserves; or in periods of pronounced monetary expansion, bank debentures issued by specialized banks ㅡ National Agricultural Cooperative Federation, National Federation of Fisheries Cooperatives, Industrial Bank of Korea, Korea Development Bank ㅡ during periods determined by the Monetary Policy Board after consultation with the government regarding whether reserves should be accumulated and the periods of such accumulation. (Article 12. (2) of the Enforcement Decree of the Bank of Korea Act.). Reserve Requirement Ratio by Deposit Type(as of March 3,2018) Reserve Requirement Ratio by Deposit Type
* Those issued to financial institutions subject to reserve requirements are excluded. Each financial institution is required to maintain minimum reserves against its liabilities subject to reserve requirements, which are calculated monthly ㅡ from the first to the last day of the month ㅡ based on the daily average outstanding balance of liabilities, from the Thursday of the second week of the next month to the Wednesday of the second week of the month after that. Example of Calculation and maintaining reserve requirements (Jan. 2018)Monthly Plan
Yearly Plan
Log in through your institution journal article Reserve Requirements and the Inflation TaxJournal of Money, Credit and Banking Vol. 21, No. 1 (Feb., 1989) , pp. 106-121 (16 pages) Published By: Ohio State University Press https://doi.org/10.2307/1992581 https://www.jstor.org/stable/1992581 Read and download Log in through your school or library Subscribe to JPASS Unlimited reading + 10 downloads Journal Information Founded in 1969, the Journal of Money, Credit and Banking (JMCB) is a leading professional journal read and referred to by scholars, researchers, and policymakers in the areas of money and banking, credit markets, regulation of financial institutions, international payments, portfolio management, and monetary and fiscal policy. The JMCB represents a wide spectrum of viewpoints and specializations in its fields through its advisory board, associate editors, and referees from academic, financial, and governmental institutions around the world. Publisher Information The Ohio State University Press was established in 1957 and currently publishes 50-60 new books a year. We specialize in literary and cultural studies, (including comics, narrative theory, Victorian studies, and medieval studies) American studies, rhetoric and communication, gender and sexuality studies, and race and ethnic studies (including Black studies and Latinx studies). We also acquire books in regional studies on our Trillium imprint, creative works, on our Mad Creek imprint, and linguistics. In addition to its books, the Press publishes a distinguished group of journals including Inks, the journal of the Comics Studies Society, American Periodicals, Victorians, North American Journal of Celtic Studies, and Narrative. Rights & Usage This item is part of a JSTOR Collection. What are some examples of contractionary monetary policy?A direct benefit of contractionary monetary policy is that it strengthens government budgets. For example, when the Fed's discount rate increases, the government earns more money from the banks that borrow funds from the Fed's discount window.
Which of the following is an example of monetary policy?Answer and Explanation: Option b. The government lowers interest rates to make it cheaper for people and businesses to borrow money.
Which of the following is an example of expansionary monetary policy?The Federal Reserve has three expansionary monetary policy methods: lowering interest rates, decreasing banks' reserve requirements, and buying government securities. Expansionary monetary policy's aim is to make it easier for individuals and companies to borrow and spend money — actions that all stimulate the economy.
What are the 3 monetary policy tools?Implementing Monetary Policy: The Fed's Policy Toolkit. The Fed has traditionally used three tools to conduct monetary policy: reserve requirements, the discount rate, and open market operations.
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Higher interest rates, increase in the reserve requirement and higher taxes are all examples of
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