Reserve Requirements and Real Exchange Rate Misalignments in Emerging Market Economies

Axel Loeffler

Review of Development Economics, 2015, vol. 19, issue 3, 516-530

Abstract: A popular policy target in emerging markets is the real exchange rate as an undervalued real exchange rate is seen to enhance international competitiveness. Within an augmented Dornbusch model it is shown that the implicit tax of low remunerated reserve requirements represents an efficient tool to depreciate the real exchange rate. The model is empirically tested for a panel of Latin American, East Asian and Eastern European countries. Controlling for the impact of fiscal policies and direct capital controls, the reserve requirement tax significantly explains real exchange rate misalignments.

Date: 2015
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