Abstract
serves at the beginning of the planning period, r is the opportunity cost of reserve holdings measured by an alternative rate on earning assets, p is the per dollar cost of a reserve deficiency, and L is the net dollar loss of deposits during the period. The first term on the right of equation (1) measures the opportunity cost of reserve holdings and the second term on the right measures expected losses, over the planning period, resulting from deposit variability. The decision rule for determining optimal reserve management involves the minimization of (1). The main contribution of B-B to the theory of reserve management is an attempt to specify more completely the bank's expected reserve cost function.
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