Reserve Requirements and Economic Models

The role of reserve requirements has been a matter of continuous debate in the monetary policy related literature. The heterogeneity in its application across countries suggests that there is no consensus on the optimal strategy to follow regarding this policy tool. In this paper I review models in which reserve requirements policies play different roles. Given the changing nature of such roles, economists differ in how effective these policies are. An important aspect to highlight is that the recent theoretical literature conceptualizes reserve requirements as a mean to stabilize the banking system and to help achieve a central bank’s macroeconomic objectives.