Abstract
This paper investigates the money supply process on a microeconomic level by developing an inventory-theoretic model of commercial bank reserves, correspondent balances, and correspondent services; by deriving the comparative-static properties of the model for member and non-member banks; and by incorporating these properties into a stochastic money supply framework. In general, correspondent balances and services were found to have mixed effects on the reserve-requirement and interest-rate sensitivities of both the expected value and the variance of the money supply, but most of this ambiguity should eventually be reduced by the Monetary Control Act of 1980.
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