Reserve requirements in the SBCS and CNB instrumentaria

Main purpose of this paper is to analyse reserve requirements as one of the most controversial monetary policy tool at all. The first part of the paper focuses on reserve requirements in a broader context of the monetary policy of the SBCS, the CNB respectively, during the period 1989 - 1998. The first part of the article deals with issues like the side effects of reserve requirements, rationales justifying their existence in the monetary policy instrument set or the trade-off between the monetary stability and banking industry stability goals of the central bank. This critical analyse of the role of reserve requirements in monetary policy schemes during recent years creates a useful framework for the second part. In this part potential reforms of reserve requirements are discussed and possible effects of reserve requirements on the monetary system of the Czech Republic are specified in more detail.<p> It is clear reserve requirement are redundant instrument within the new inflation targeting regime adopted by the CNB almost a year ago. But more important question coming to a mind is how to abolish reserve requirements without causing destructive side effects on the whole monetary and banking system. By discussing these issues the paper leads to a crucial conclusion: Czech monetary policy-makers should prefer continuous and gradual way of lowering the rate of reserve requirements to the very quick and unanticipated one even though the existence of reserve is not sustainable any more.