A Comment on "Nonmember Banks and Empirical Measures of the Variability of Reserves and Money: A Theoretical Appraisal"

Abstract

A NOTE BY KENNETH Kopecky [3] which recently appeared in this Journal is essentially a comment on an earlier paper by me [7] which was also published in this Journal.' My paper reports the results of an empirical test of whether the absence of Federal Reserve System [FRS] reserve requirements on the liabilities of nonmember banks contributed to imprecision in FRS money stock control during the 1961-73 period. The findings of my study were negative: I found no evidence to support the contention that the lack of FRS reserve requirements on nonmember banks were a source of slippage in FRS money stock control during the sample period. Kopecky argues that my test method was faulty and, hence, that the results of my study shed no light on the question of whether FRS reserve requirements are needed on the liabilities of nonmember banks to improve the precision of money stock control. The purpose of this comment (reply) is to point out that Kopecky's argument is based upon a very restrictive interpretation of what it means to impose FRS reserve requirements on nonmember banks and to defend the validity of my test method. Section I presents the most important elements of Kopecky's model (slightly modified by me)-the model which he employs in arguing against my test method. Section II points out the critical assumption upon which Kopecky's argument rests and explains why my test method is valid. Section III contains some final remarks.