CHAPTER 18 The Conduct of Monetary Policy: Strategy and Tactics 477 Overnight Interest Rate, ior Rs ior * ior ior NBR* F I G U R E 18 - Quantity of Reserves, R Result of Targeting on Nonborrowed Reserves Targeting on nonborrowed reserves of NBR* will lead to fluctuations in the overnight funds rate + and i ++or because of fluctuations in the demand for reserves between R d + and Rd ++ between i or target growth rate of the money supply of 4%), it expects that the overnight funds rate will be i*or However, as the figure indicates, the fluctuations in the reserves demand curve between R d + and R d ++ will result in a fluctuation in the overnight funds rate between i+or and ior++ Pursuing an aggregate target implies that interest rates will fluctuate The supply and demand diagram in Figure 18-4 shows the consequences of an interest-rate target set at i*or Again the central bank expects the reserves demand curve to be at R d *, but it fluctuates between R d + and R d ++ due to unexpected changes in banks desire to hold reserves If the demand curve rises to R d ++, the overnight funds rate will begin to rise above i*or and the central bank will Overnight Interest Rate, ior Rs Overnight Funds * Rate Target, ior * ior NBR NBR* NBR F I G U R E 18 - Quantity of Reserves, R Result of Targeting on the Overnight Funds Rate Targeting on the interest rate i or * will lead to fluctuation on nonborrowed reserves because of fluctuations in the demand for reserves between Rd + and Rd ++