Optimal Bank Reserve Remuneration and Capital Control Policy

Chun-Che Chi, Stephanie Schmitt-Grohe and Martín Uribe

No 29473, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A central prediction of open economy models with a pecuniary externality due to a collateral constraint is that the unregulated economy overborrows relative to what occurs under optimal policy. A maintained assumption in this literature is that households borrow directly from foreign lenders. This paper shows that if foreign lending is intermediated by domestic banks and the government has access to capital controls and interest on bank reserves, the unregulated economy underborrows. The optimal bank reserve policy is countercyclical. By increasing bank reserves during contractions, the government acts as a lender of last resort to collateral-constrained households.

JEL-codes: E58 F38 F41 (search for similar items in EconPapers)
Date: 2021-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
Note: EFG IFM ME
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Journal Article: Optimal Bank Reserve Remuneration and Capital Control Policy (2025)
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