Assessing the Effectiveness of Currency-Differentiated Tools: The Case of Reserve Requirements

Annamaria De Crescenzio, Etienne Lepers and Zoe Fannon
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Annamaria De Crescenzio: OECD
Zoe Fannon: Somerville College, Oxford

International Journal of Central Banking, 2023, vol. 19, issue 5, 439-492

Abstract: This paper analyzes the benefits and side effects of foreigncurrency-differentiated reserve requirements, a widely used tool to limit currency risks. Departing from the existing macroprudential policy literature that uses binary policy variables, we study the gap between foreign- and local-currency reserve requirement rates to isolate the impact of the currency differentiation net of volume effects. First, increasing the gap appears generally effective in reducing currency mismatches and dollarization in banks’ balance sheets. Second, a higher gap is associated with a broader reduction of portfolio debt inflows and flows to non-banks. Third, we find little evidence of domestic or international circumvention.

JEL-codes: E01 E32 E42 E58 E61 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Assessing the effectiveness of currency-differentiated tools: The case of reserve requirements (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2023:q:5:a:10

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