Abstract

The Character of Freely Disposable Liquidity Reserves

For the banking system as a whole, freely disposable liquidity reserves are a sort of factor of production to which recourse is taken to the extent that central bank money is needed. Depending on the institutional circumstances, the central bank can control or influence the price or quantity of that potential factor of production. The money market performs an adjusting function among the banks. From the macroeconomic standpoint, the free liquidity reserves definitely have a sort of reserve or buffer function. Therein lie their advantages and disadvantages. Their very existance permits elastic adjustment of the quantity of central bank money to demand. At the same time, however, this deprives the central bank of any direct control of the supply of central bank money. The individual banks, however, do not have to depend on such liquidity reserves or buffer stocks. Consequently, the free liquidity reserves cannot be deduced from the reserve behaviour of the individual banks. Furthermore, it is also impossible to explain possible borrowing as a portfolio decision of the individual banks. The microeconomic approaches cannot provide a satisfactory explanation