The interbank market helps regulate liquidity in the banking sector. Banks with outstanding resources usually lend to banks that are in need of liquidity. Regulating the interbank market may actually benefi t the policy stance of monetary policy. Introducing an interbank market in a general equilibrium model may allow better identi cation of the final eff ects of non-conventional policy tools such as reserve requirements. We introduce an interbank market in which there are two types of private banks and a central bank that has the ability to issue money into a DSGE model. Then, we use the model to analyse the eff ects of changes to reserve requirements (a macroprudential tool), while the central bank follows a Taylor rule to set the policy interest rate. We end that changes to reserve requirements have similar effects to interest rate hikes and that both monetary policy tools can be used jointly in order to avoid big swings in the policy rate (that could have an undesired eff ect on private expectations) or a zero bound (i.e. liquidity trap scenarios).
Not for everyone, but still interesting is this paper by César Carrera and Hugo Vega that sets out to demonstrate in economics terms something we on the outside of the sector have understood intuitively for quite some time; that Central Banks use the raising or lowering of bank reserve requirements to control the macroeconomy in much the same way as the more traditional (and headline making) hikes or drops in interest rates. Here's the abstract from the paper:
Click through for more. It does eventually lapse into squiggly line stuff, but there's plenty of plainspeak all the way through and the conclusion is pure commonsense.