Abstract
In the U.S., existing monetary base measures add an adjustment factor for changes in reserve requirement ratios to high powered money. Implicitly, the monetary base assumes that the economic effects of changes in reserve requirements are identical to those due to changes in high-powered money. Theory, however, does not generally support the prediction that the two policy tools will have the same economic effects. Structural VARs are estimated to compare the short-run paths of inflation and output growth under two different types of policy shocks. In doing so, this analysis gives one a measure of the costs associated with this implicit equivalence assumption. The evidence is consistent with the hypothesis that the Federal Reserve at least partially offsets reserve requirement changes with open market operations and the hypothesis that dynamic explanations of macroeconomic variables are improved by separating reserve requirement changes from other monetary policy moves.
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