Hi, what's the differences between a limited reserve and ample reserve system? Also, why does the change in money supply does not impact the interest rate in the ample reserve system?
The main difference between a limited reserve and an ample reserve system can be seen by their names. In a limited reserve system, the amount of reserve held by the Fed is scarce. This type of banking system was used until 2008, before the financial crisis. On the other hand, in an ample reserve system, there are way higher amount of reserves held by the Fed. Hence, policies used to change the policy rate is different.
In a limited reserve system, the Fed mainly uses open market operations to change the money supply (reserves). On the other hand, in an ample reserve system, the Fed mainly changes the IORB (Interest rate On Reserve Balance) to shift the demand for reserve, which would change the policy rate.
The change in money supply not having much impact on the policy rate can be seen by the reserve system graph. In the graph, the ample reserve system is the right section of the graph (lower straight line). Because there are extremely high reserves held by the Fed, change in money supply has little to no impact on the policy rate. As you can see in the graph, because the right section of the graph is a straight line, shift in supply won't affect the policy rate much.
Hi James,
The main difference between a limited reserve and an ample reserve system can be seen by their names. In a limited reserve system, the amount of reserve held by the Fed is scarce. This type of banking system was used until 2008, before the financial crisis. On the other hand, in an ample reserve system, there are way higher amount of reserves held by the Fed. Hence, policies used to change the policy rate is different.
In a limited reserve system, the Fed mainly uses open market operations to change the money supply (reserves). On the other hand, in an ample reserve system, the Fed mainly changes the IORB (Interest rate On Reserve Balance) to shift the demand for reserve, which would change the policy rate.
The change in money supply not having much impact on the policy rate can be seen by the reserve system graph. In the graph, the ample reserve system is the right section of the graph (lower straight line). Because there are extremely high reserves held by the Fed, change in money supply has little to no impact on the policy rate. As you can see in the graph, because the right section of the graph is a straight line, shift in supply won't affect the policy rate much.
Does this answer your question?