Reserve Requirements for Price and Financial Stability: When Are They Effective?

Christian Glocker and Pascal Towbin

International Journal of Central Banking, 2012, vol. 8, issue 1, 65-114

Abstract: Reserve requirements are a prominent policy instrument in many emerging countries. The present study investigates the circumstances under which reserve requirements are an appropriate policy tool for price or financial stability. We consider a small open-economy model with sticky prices, financial frictions, and a banking sector that is subject to legal reserve requirements and compute optimal interest rate and reserve requirement rules. Overall, our results indicate that reserve requirements can support the price stability objective only if financial frictions are important and lead to substantial improvements if there is a financial stability objective. Contrary to a conventional interest rate policy, reserve requirements become more effective when there is foreign currency debt.

JEL-codes: E52 E58 F41 G18 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (110)

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Working Paper: Reserve Requirements for Price and Financial Stability - When Are They Effective? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2012:q:1:a:4

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