Monetary policy, compulsory deposits and inflation
Since the outset of the Real Plan, the government has resorted to much higher
reserve requirements on bank’s liabilities, as well as to the creation of reserve requirements
on credit (a bank’s asset) in the attempt to restrict the expansion of monetary aggregates
and credit. The policy intention was right, although the design of the reserve requirements
profile, i.e., the relative structure of the reserve requirements on the different bank’s liabilities,
was flawed. This is because there is a very high (initially a 100% marginal) reserve
requirement on demand deposits, which is the liability that typically grows the most when
high inflations subside. Since the beginning of 1995, tax changes made profitable to transfer
even very short-term funds from demand deposits to short term mutual funds. Furthermore,
when such transfer is undertaken, the overall reserve requirement falls substantially. The
main policy recommendation is to use both the reserve requirements’ profile and the tax structure so that the aggregate financial wealth is distributed among its several components
in a way compatible with low inflation. This will avoid future reallocations of portfolio,
thereby increasing the efficacy of monetary policy.
JEL Classification: E58; E52.
Keywords: Reserve requirement monetary policy stabilization inflation