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Reserve requirements as a macroprudential instrument – Empirical evidence from Brazil

Christian Glocker and Pascal Towbin

Journal of Macroeconomics, 2015, vol. 44, issue C, 158-176

Abstract: Emerging market central banks are often reluctant to raise interest rates when facing credit booms driven by capital inflows, and they instead use reserve requirements as an additional instrument. We compare the macroeconomic effects of interest rate and reserve requirement shocks by estimating a structural vector autoregressive model for Brazil. For both instruments, discretionary tightening results in a credit decline. Contrary to an interest rate shock, however, a positive reserve requirement shock leads to an exchange rate depreciation, a current account improvement, and an increase in prices. The different effects highlight the role of reserve requirement policy as a complement to rather than a substitute for interest rate policy. The results support the bank lending channel as the main transmission mechanism for reserve requirement policy.

Keywords: Reserve requirements; Capital flows; Central bank policy; Macroprudential policy; Business cycle (search for similar items in EconPapers)
JEL-codes: G28 E58 E52 F32 (search for similar items in EconPapers)
Date: 2015
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