An Early Look at the Volatility of Money and Interest Rates under CRR

Abstract

the Federal Reserve enacted a system of contemporaneous reserve requirements (CRR) to replace the system of lagged reserve requirements (LRR) that had been in effect since September 1968.The Fed made this change in response to widespread criticism that, under a reserve target operating procedure, LRR made it more difficult to control the monetary aggregates and contributed to the volatility of money and, perhaps, interest rates.Thus, critics believed a return to CRR would reduce the volatility of money and might reduce the volatility of interest rates as well.'The purpose of this article is to determine whether the return to CRR has had, so far, any significant impact on the variability of money and interest rates.The article begins with a concise review of the arguments bearing on the presumed effects of the change from Daniel L. Thornton is a senioreconomist at the Federal Reserve Bankof St. Louis.John G