The Macroeconomic Effects of Reserve Requirements

Christian Glocker and Pascal Towbin

No 420, WIFO Working Papers from WIFO

Abstract: When dealing with credit booms driven by capital inflows, monetary authorities in emerging markets are often reluctant to raise interest rates, as they fear that an increase attracts even more capital and appreciates the currency. A number of countries therefore use reserve requirements as an additional policy instrument. The present study provides evidence on their macroeconomic effects. We estimate a vector autoregressive (VAR) model for the Brazilian economy and identify interest rate and reserve requirement shocks. For both instruments a discretionary tightening leads to a decline in domestic credit. We find, however, very different effects for other macroeconomic aggregates. In contrast to interest rate policy, a positive reserve requirement shock leads to an exchange rate depreciation and an improvement in the current account, but also to an increase in prices. The results suggest that reserve requirement policy can complement interest rate policy in pursuing a financial stability objective, but cannot be its substitute with regards to a price stability objective.

Keywords: Business Cycle; Capital Flows; Monetary Policy; Reserve Requirements (search for similar items in EconPapers)
Pages: 39 pages
Date: 2012-02
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Downloads: (external link)
https://www.wifo.ac.at/wwa/pubid/43532 abstract (text/html)

Related works:
Working Paper: The Macroeconomic Effects of Reserve Requirements (2012)
Working Paper: THE MACROECONOMIC EFFECTS OF RESERVE REQUIREMENTS (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:wfo:wpaper:y:2012:i:420

Access Statistics for this paper

More papers in WIFO Working Papers from WIFO Contact information at EDIRC.
Bibliographic data for series maintained by Florian Mayr ().