Banks' demand for reserves when future monetary policy is uncertain

The extensive use of revolving securities repurchase agreements has increased the flexibility of the money market management of many European central banks. Using an extended reserve management model, this paper shows that a flexible central bank can influence money market conditions just by being more or less vague or determined about its future course of monetary policy. Employing ARCH-in-mean models for German money market rates confirms that more uncertainty reduces banks' demand for borrowed reserves and, thereby, leads to decreasing interest rates in the interbank money market. (C) 1998 Elsevier Science B.V. All rights reserved.