ABSTRACT
The COVID-19 induced the central bankers to search the most efficient stimulus measures. As a solution, they made an unprecedented step. They lifted down the reserve requirement (RR) to zero. This was done in the United States [FRS. 2020. “Federal Reserve Actions to Support the Flow of Credit to Households and Businesses.” Accessed February 10, 2021. Board of the Governors of the Federal Reserve System] and Morocco [BKAM. 2020. “Monetary Policy Report No. 55.” Accessed from Central Bank of Morocco Website]. The existing monetary theory literature suggests that the broad money supply should go to infinity as a result. Then we may expect the rapid economic recovery. However, this may not come true. The novelty of this paper is the development of the money multiplier theory. We explain why a step to set the RR at zero may boost (though slight) the cash-intensive economy (like Morocco) and may not deliver any benefit to a mostly cashless one (like the US, Canada, or the EU).
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Acknowledgements
Author is grateful to the anonymous reviewers for their insightful comments who helped to materially improve the paper. Opinions expressed in the paper are solely those of the author and may not reflect those of the affiliated institutions.
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Correction Statement
This article has been republished with minor changes. These changes do not impact the academic content of the article.
Notes
1 Website of the European Central Bank. Accessed July 18, 2020. https://www.ecb.europa.eu/explainers/tell-me/html/minimum_reserve_req.en.html