special deposit


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special deposit

see MONETARY POLICY.

special deposit

an instrument of MONETARY POLICY involving the placement of a specified proportion of the banking sector's liquid assets with the CENTRAL BANK as a means of controlling the MONEY SUPPLY. Special deposits are excluded from the bank's liquidity or RESERVE-ASSET RATIO. Thus, if the monetary authorities wish to reduce the money supply they can call for a special deposit. This will lower the liquidity base of the banking sector. As a result, banks will be forced to reduce their lending, leading to a multiple contraction of bank deposits and, hence, a fall in the money supply

In the UK the BANK OF ENGLAND has occasionally called for special deposits and for ‘supplementary special deposits’ (referred to as the corset) to counteract sudden increases in banking sector liquidity.

See BANK DEPOSIT CREATION.

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