We demonstrate that the financial market's reaction to changes in reserve regulation implies that reserve requirements are an excise tax on banking activities. Changes in reserve requirements do not influence yields on Treasury securities or returns on broad-based portfolios of nonfinancial stocks and thus do not impound new information about monetary policy. Moreover, changes in reserve requirements have an impact on nonbank financial firms that is opposite in sign to that of banks. This suggests that reserve requirements shift the locus of some financial activities from the banking sector to the nonbank sector of the financial system.
ASJC Scopus subject areas
- Economics and Econometrics