Reverse-lag reserve accounting, bank behavior, and monetary control: A formal analysis

Conclusion

The fundamental conclusion of the analysis contained in this paper is that Laurent's claims concerning the potential monetary control enhancements of the adoption of a reverse-lag reserve accounting system are correct. This result conflicts with those reached by other studies of the monetary control properties of RLA, because the model of RLA used in this paper has been based on an analysis of the microeconomic behavior of banks. The conclusion that monetary control could be improved by adoption of RLA vindicates Laurent's [1984] argument that a “microbank analysis” is fundamental to understanding correctly the workings of an RLA system.

An important qualification that prohibits a conclusion that RLA clearly is superior to lagged or contemporaneous accounting is that the monetary control enhancements resulting from adoption of RLA are mitigated to some extent by the existence of the Federal Reserve discount window. Indeed, the relative desirability of RLA as compared to alternative reserve accounting systems cannot be evaluateda priori in the presence of a discount window. Any serious consideration of RLA would need to be prefaced by a careful study of the relationship of the money stock to bank borrowing in an RLA setting.