Required reserves as a credit policy tool

Yasin Mimir, Enes Sunel and Temel Taskin

The B.E. Journal of Macroeconomics, 2013, vol. 13, issue 1, 823-880

Abstract: This paper quantitatively investigates the role of reserve requirements as a credit policy tool. We build a monetary dynamic stochastic general equilibrium (DSGE) model with a banking sector in which an agency problem between households and banks leads to endogenous capital constraints for the latter. In this setup, a countercyclical required reserves ratio (RRR) rule that responds to expected credit growth is found to countervail the negative effects of the financial accelerator mechanism triggered by productivity and bank capital shocks. Furthermore, it reduces the procyclicality of the financial system compared to a fixed RRR policy regime. The credit policy is most effective when the economy is hit by a financial shock. A time-varying RRR policy reduces the intertemporal distortions created by the fluctuations in credit spreads at the expense of generating higher inflation volatility, indicating an interesting trade-off between price stability and financial stability.

Keywords: banking sector, time-varying reserve requirements, macroeconomic, financial shocks, JEL Classification: E44; E51; G21; G28 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
https://doi.org/10.1515/bejm-2012-0093 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
Working Paper: Required reserves as a credit policy tool (2012)
Working Paper: Required Reserves as a Credit Policy Tool (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:bejmac:v:13:y:2013:i:1:p:58:n:4

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/bejm/html

DOI: 10.1515/bejm-2012-0093

Access Statistics for this article

The B.E. Journal of Macroeconomics is currently edited by Arpad Abraham and Tiago Cavalcanti

More articles in The B.E. Journal of Macroeconomics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().