The RRR is only one example of a textbook sterilization instrument.

The two 50 basis point RRR increases just locked up the same amount of liquidity.

But the most recent RRR increases serve mainly to sterilize the passive money supply caused by the increase in foreign exchange reserves.

Money used by commercial banks to satisfy the RRR, which is held in accounts at the PBC, can no longer be extended as loans.

CAMBRIDGE The United States Federal Reserve s policy of quantitative easing is reducing the value of the dollar relative to other currencies that have floating exchange rates.

BEIJING Not long after the United States Federal Reserve Board announced its second round of quantitative easing (known as QE2), the People s Bank of China (PBC), China s central bank, announced two increases of 0.5 percentage points in the required reserve ratio (RRR) of bank deposits.

Moreover, both have a reputation for believing that the Fed should not place excessive weight on price stability relative to unemployment.

For how long will this sterilization continue, and how far will it go? At what point will higher RRR levels cause Chinese commercial banks to begin running losses?

This is a small sum relative to Russia s currency reserves, but plenty for the underdeveloped banking system, which experienced a severe credit squeeze.

Backups

Bernanke also noted the possibility of temporarily raising the Fed s medium term inflation target (a policy that I suggested in this column in December 2008).

The Fed Trap

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Reserve Reform

THE YEXECUTIVE COMMITTEE OF THE HIGH COMMISSIONER'S PROGRAMME

Financial reserve

(f) Operating reserve

At the beginning of the year, the RRR increases could be regarded as part of efforts to correct the over supply of money that arose from the anti crisis stimulus package.

So, instead of becoming the principal reserve asset of the global system, the proportion of SDRs in global reserves shrank to a tiny fraction, rendering the SDR the monetary equivalent of Esperanto.

The Fed s Culture War

Fighting the Fed

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The Federal Reserve and the Currency Wars

The Federal Reserve s Relevance Test

The Impotence of the Federal Reserve

Indeed, former Chairman of the US Federal Reserve Paul Volcker sees the US as so macroeconomically vulnerable as to be running a 75 chance of a full fledged dollar crisis over the next several years.

The Fed Under Fire

The Fed s Communication Breakdown

The Federal Reserve s Escape from New York

The Fed s Dollar Distraction

The Fed Sets Another Trap

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Fed Up with the Fed

Don t Follow The Fed