Mopping up excess liquidity

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Emil Pulsifer

May 29, 2010, 6:46:18 PM5/29/10
Regarding the (potential) problem of excess bank reserves and the need
to eliminate the excess should inflation threaten, what about the
simple tool of changing the reserve ratios?

That is, banks are required to keep reserves equalling a certain
percentage of deposits. Current Fed policy applies this only to
demand deposits (e.g., checking accounts) and the amount is 10 percent
for large banks. But the Monetary Control Act of 1980 allows the Fed
to set a reserve requirement of up to 14 percent on transaction
accounts and up to 9 percent on nonpersonal time deposits.
Legislative modification could authorize further reserve requirements.

Simply by changing the fractional reserve requirements for banks, it's
possible to keep "excess liquidity" out of the system.

Has anyone suggested this, or provided any firm figures?

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