Working Paper: NBER ID: w9388
Authors: Eduardo Jallathcoria; Tridas Mukhopadhyay; Amir Yaron
Abstract: In this paper we investigate how well banks manage their reserves. The optimal policy takes into account expected foregone interest on excess reserves and penalty costs for going below required reserves. Using a unique panel data-set on daily clearing house settlements of a cross-section of Mexican banks we estimate the deposit uncertainty banks face, and in turn their optimal reserve behavior. The most important variables for forecasting the deposit uncertainty are the interbank fund-transfers of the day, certain calendar dates, and the interest differential between the money market rate and the discount rate - a measure reflecting the bank's opportunity cost of money holdings. For most banks the model's prediction accord relatively well with the observed reserve behavior of banks. The model produces reserves costs that are significantly smaller relative to the case when reserves are set via simple rule of thumb. Furthermore, alternative motives for holding reserves (such as liquidity and reputation effects) do not seem to be the explanation for why certain banks hold relatively large reserves.
Keywords: No keywords provided
JEL Codes: G21; D80
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Optimal reserve management policy (E63) | Banks' cost structures (G21) |
| Interbank fund transfers (F33) | Deposit uncertainty (E41) |
| Certain calendar dates (G14) | Deposit uncertainty (E41) |
| Interest differential (E43) | Deposit uncertainty (E41) |
| Model's predictions (C52) | Actual reserve management practices (E63) |
| Optimization of reserve costs (G31) | Reserve levels (E52) |