In volatile reserve demand conditions, to maintain stable interest rates, a central bank must do what?

In volatile reserve demand conditions, a central bank aiming to maintain stable interest rates must set targets for both interest rates and the quantity of reserves. When the demand for reserves is unpredictable, simply adjusting the quantity of reserves may not suffice to stabilize interest rates. By targeting both, the central bank can ensure that it responds appropriately to fluctuations in demand while also controlling interest rates within a desired range.

This dual targeting approach enables the central bank to manage liquidity in the banking system effectively, ensuring that banks have access to the necessary reserves to meet their obligations without causing dramatic fluctuations in interest rates. By regulating the quantity of reserves, the central bank can provide stability, enabling them to adjust interest rate targets as needed based on economic conditions. This comprehensive strategy is crucial during periods of volatility to prevent economic instability.