Reserve Requirements and Money Multiplier Predictability: The Canadian Experience

Kam Hon Chu
2006 Banks and Bank Systems  
An argument against abolishing legal reserve requirements is that money multipliers would become more volatile and unpredictable in the absence of reserve requirements, thus impairing the central bank's effectiveness in controlling money aggregates. This study examines the Canadian experience during 1970-2004, where a zero reserve requirement regime has become fully effective since June 1994. The findings show that all money multipliers, except the M1 multiplier, under this current regime have
more » ... urrent regime have become less volatile than before. Furthermore, short-and medium-term ex ante forecasts based on the Holt-Winters exponential smoothing model indicate that the money multipliers have not become apparently more unpredictable. Overall, the findings do not lend strong support to the monetary control argument for reserve requirements.
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