Abstract
ABSTRACTA simple theoretical model is developed from the bank balance sheet identity to understand the effects of cash reserve ratio (CRR) on deposit multiplier. It is found that the deposit multiplier can behave perversely, depending on the loan demand and deposit supply parameters. Thus, CRR can work counter-factually and counter-intuitively, as a monetary policy tool. Further, it is found that the capital adequacy ratio – the Basel policy tool – can also work counter-intuitively. The statutory liquidity ratio tool almost mimics the CRR in performance.
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