Reserve requirements as a financial stability instrument

Carlos Cantu Garcia, Rocio Gondo Mori and Berenice Martinez

No 1182, BIS Working Papers from Bank for International Settlements

Abstract: We quantify the trade-offs of using reserve requirements (RR) as a financial stability tool. A tightening in RR reduces the amplitude of the credit cycle. This lowers the frequency and strength of financial stress episodes but at a cost of lower growth in credit and economic activity. We find that the gains from a lower probability and magnitude of financial stress episodes are greater than the costs from the initial reduction in economic activity. In addition, we find that RR have a stronger effect on emerging market economies than in advanced economies, both in terms of costs and benefits. Finally, we find that uniform RR have a stronger effect than RR that differenciate by maturity or currency.

Keywords: reserve requirements; macroprudential policy; financial stress episodes; early-warning system; financial cycle (search for similar items in EconPapers)
JEL-codes: E44 E58 F41 G01 G28 (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-ifn, nep-mon, nep-opm and nep-rmg
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Reserve requirements as a financial stability instrument (2019)
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