CRR

• The CRR stands for the cash reserve ratio. The ratio is set by the federal reserve, and dictates the amount of money a bank must hold in addition to the funds held as a result of customer deposits. The CRR is designed to protect banks from any withdrawal demand that may occur. The funds are stored either with the federal reserve or the banks' vaults. The cash reserve ratio in the United States is currently 10 percent of held customer deposits as of 2006.
  
  

Implications of the CRR

• The main purposes of the cash reserve ratio are indirect. By implementing a CRR, the government may influence the economy by restricting the transactions of banks. This, in turn, stabilizes money market rates by reducing their liquidity. Thus, money supply is reduced, as there is less cash floating around in the system. Reducing money supply has a negative impact on inflation.
  
  

The Repo Rate

• The repo rate is the interest rate on repurchase agreements. Repurchase agreements are when one group of people sells assets and securities to another group of people. The seller of the securities agrees to buy them back at a later date at a certain price. Such assets tend to be sold in order to gain some form of collateral. The buy-back price on the securities is often higher, and this difference, or premium, is expressed as an annualized percentage rate. It is this percentage rate that is the repo rate.
  
  

Implications of the Repo Rate

• Repurchase agreements are a common source of debt financing by governments, who in turn set a repo rate for such transactions. Changes in the repo rate affect inflation through several mechanisms. Upon an increase, market interest rates will also increase. This leads to stronger exchange rates, as well as lower firm profitability. Combined with a fall in consumption, investment, lowered import prices and a fall of exports, demand falls. This fall in demand leads to lower inflation.