Asset-based Reserve Requirements in a Dynamic Stochastic General Equilibrium Model

Tae Soo Kang () and Hyunduk Suh
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Tae Soo Kang: Korea Institute for International Economic Policy

Asian Economic Papers, 2017, vol. 16, issue 2, 216-242

Abstract: We discuss the macroeconomic effects of asset-based reserve requirements (ABRR) in a dynamic stochastic general equilibrium model. In contrast to the conventional reserve requirement system, ABRR impose reserve requirements on financial institutions’ asset holdings. The policy can be used for macro prudential purposes to reduce pro-cyclicality of financial institutions. Using a financial friction New Keynesian model based on Meh and Moran (2010), we show that ABRR can be a more effective instrument in the presence of sector-specific shocks than the Basel-III type countercyclical capital buffer. The reason is that the former policy can adjust the asset return of the specific sector hit by the shock, whereas the latter does not have such sector-specific treatment.

JEL-codes: F33 F36 F50 F65 G00 (search for similar items in EconPapers)
Date: 2017
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