How Regulations Affect Monetary Control: Comment

Abstract

James L. Pierce's paper offers an overview of the nexus between monetary control and virtually the entire regulatory environment. The section on required reserve ratios and reservable liabilities contains a concise discussion of the relevant regulations in the pre and post Monetary Control Act (MCA) environments. He concludes, I think correctly, that once phased in, the MCA will contribute to closer monetary control. ' However, I do not find convincing his argument that during the eight-year transition period, control over M1 could get worse before it gets better unless the Federal Reserve eliminates reserve requirements on deposits not included in narrow money, such as nonpersonal time deposits, interbank deposits, and government deposits. One consideration is that the old reserve requirement structure for members, including reserve requirements on time deposits, is set in stone during its three and one-half year phase-out. Consequently, even though as Pierce notes the Federal Reserve has the legal authority to reduce to zero the reserve ratios on nonpersonal time deposits and Eurodollar liabilities under the new structure, some reserve requirements would still remain on these liabilities until March 1984. A second consideration is that reserve requirements on nonpersonal time deposits, somewhat paradoxically, can be designed to enhance control over M1. By raising required reserves in the aggregate, they reduce the number of institutions that can satisfy reserve requirements wholly through vault cash held in any case to serve operating needs. Owing to vault cash in excess of reserve requirements, such nonbound institutions have no reason to open reserve accounts at the Federal Reserve. Because movements in their surplus vault cash are not closely related to movements in their transactions deposits, the ratio of M1 to a definition of