The Macroeconomic Effects of Reserve Requirements

Christian Glocker and Pascal Towbin

Working papers from Banque de France

Abstract: Monetary authorities in emerging markets are often reluctant to raise interest rates when dealing with credit booms driven by capital inflows, as they fear that an increase attracts even more capital and appreciates the currency. A number of countries therefore use reserve requirements as an additional policy instrument. The present study provides evidence on their macroeconomic effects. We estimate a vector autoregressive (VAR) model for the Brazilian economy and identify interest rate and reserve requirement shocks. For both instruments a discretionary tightening leads to a decline in domestic credit. We find, however, very different effects for other macroeconomic aggregates. In contrast to interest rate policy, a positive reserve requirement shock leads to an exchange rate depreciation and an improvement in the current account, but also to an increase in prices. The results suggest that reserve requirement policy can complement interest rate policy in pursuing a financial stability objective, but cannot be its substitute with regards to a price stability objective.

Keywords: Reserve Requirements; Capital flows; Monetary Policy; Business Cycle. (search for similar items in EconPapers)
JEL-codes: E52 E58 F32 F41 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2012
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Related works:
Working Paper: THE MACROECONOMIC EFFECTS OF RESERVE REQUIREMENTS (2012)
Working Paper: The Macroeconomic Effects of Reserve Requirements (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:374

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