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Money in the Modern World

Josef Jílek and Roman Matousek

The book explains the framework of the money, liquidity and monetary policy in the USA, the Eurozone, Japan, and the United Kingdom. Even if the book is based on contemporary banking practice, it arises from careful examination of the historical development of opinions on money, liquidity and monetary policy. The authors claim that money and liquidity (and the financial system as a whole) are demonstrated best through financial statements (balance sheet and income statement) which are based on accounting. Thus any operation is clarified through double-entry record. Furthermore, the fundamentals of the payment systems are outlined.

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Part II: Liquidity 67

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67 Part II: Liquidity 4 Liquidity and reserve requirements Some central banks still impose reserve requirements (required reserves) on commercial banks. The reasons for their existence are of rather historical and technical character than economic. Reserve requirements consist in the obliga- tion of commercial bank to hold a certain balance (liquidity) on its clearing ac- counts (nostro accounts) at central bank so that the average liquidity of any bank during a period is equal or higher than the reserve requirement of this commer- cial bank. Some central banks allow commercial banks to include in this obliga- tion the currency held in their vaults. The amount of reserve requirement is cal- culated as the reserve ratio (set by central bank) multiplied by the volume of commercial bank’s reservable liabilities (the so-called reserve base). Reserve requirements in many countries historically decline. In some countries reserve requirements do not exist anymore (e.g. in Canada, Denmark, Mexico, New Zealand, Norway and Sweden). Originally, there was no interest paid on required reserves. But central banks in countries, where required reserves were not abandoned yet, started to pay the interest on them. Interest is mostly based on interbank interest rates. In some countries, one part of reserves does not bear interest, and the other part does.7 4.1 Liquidity and bank reserves Liquidity is generally the term for balances on interbank (commercial banks and central banks) current accounts but not balances on interbank term accounts. For the liquidity of commercial banks on central bank’s current account (clear-...

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