On the Optimality of Reserve Requirements
Richard D. Cothren, Roger N. Waud
NBER Technical Working Paper No. 101
An implicit rationale for a bank reserve requirement is that a central monetary authority is in a unique position (as "social planner) to impose a "socially superior" outcome to that yielded by a free banking system. We illustrate how this can be true in the context of a simple economy modeled to mimic certain basic characteristics of a monetary economy with banks and agents who trade with one another. Banks exist in our model because by pooling liquidation risks they provide liquidity otherwise unavailable to depositors, which, in turn, provides the incentive - for using deposit claims as the medium of exchange.
Published: Cothren, Richard D. and Roger N. Waud. "On The Optimality Of Reserve Requirements," Journal of Money, Credit and Banking, 1994, v26(4), 827-838.