Reserve Requirement Policy over the Business Cycle

Pablo Federico, Carlos Vegh and Guillermo Vuletin

No 20612, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Based on a novel quarterly dataset for 52 countries for the period 1970-2011, we analyze the use and cyclical properties of reserve requirements (RR) as a macroeconomic stabilization tool and whether RR policy substitutes or complements monetary policy. We find that (i) around two thirds of developing countries have used RR policy as a macroeconomic stabilization tool compared to just one third of industrial countries (and no industrial country since 2004); (ii) most developing countries that rely on RR use them countercyclically; and (iii) in many developing countries, monetary policy is procyclical and hence RR policy has substituted monetary policy as a countercyclical tool. We interpret the latter finding as reflecting the need of many emerging markets to raise interest rates in bad times to defend the currency and not raise or lower the interest rate in good times to prevent further currency appreciation. Under these circumstances, RR policy provides a second instrument that substitutes for monetary policy. Evidence from expanded Taylor rules (i.e., Taylor rules that include a nominal exchange rate target) supports these mechanisms.

JEL-codes: E52 F41 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (54)

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Working Paper: Reserve Requirement Policy over the Business Cycle (2014)
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