Federal Reserve Bank of St. Louis

nonpersonal time deposits.and required reserves foil by about $10 billion, an almost 20 percent reduction. In early 1992, reserve requirements against transaction accounts vert lowered to 10 percent from 12 percent, releasing an additional $3.5 billion of roquired reserves.2 These reductions in required reserves have raisod concerns that lover total reserve balances will result in increased reserve market volatility, which could impede the implementation of monetary policy. Moreover, this increased volatility could, in principle, spill over into other markets. This paper examines the effects of reserve requirements on market volatility and on the central bank's ability to achieve short-run policy objectives. Although a number of earlier studies examined the effects of reserve requirements, our approach differs in tvo important respects. First, previous studies, such as Kaminov (1977), Siegel (1981), Baltensperger (1982), Froyen and Kopecky (1983), and Horrigan (1988), focused on longer-term objectives of monetary policy. In contrast, ve focus on the use of short-run control procedures, such as reserve requirements and open market operations, to achieve short-run policy objectives. As illustrated in Figure 1, the implementation of monetary policy can be viewed as consisting of a hierarchy of instruments, targets, an