Said in connection with a central bank’s minimum reserve policy. By increasing and decreasing the reserve requirement, the central bank defines the framework within which banks can operate. – Only in extreme situations, however, does a central bank limit the money supply in this way. In the normal case, the money supply initially develops via market forces from the interaction between the central bank and economic agents. Under normal circumstances, the central bank can then influence the behavior of economic agents primarily through its interest rate policy by linking the banks to the central bank. – See linkage function, arbitrage, intertemporal, fragmentation, money market operations, interest rate corridor. – Cf. ECB Monthly Bulletin, February 2008, p. 77 (money market rates are to be firmed up on the basis of the average fulfillment of the reserve requirement).
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