Effectiveness of Macroprudential Policies under Maturity Mismatch

Liu Yang and Yuhuan Yi

Emerging Markets Finance and Trade, 2020, vol. 56, issue 12, 2826-2851

Abstract: This paper studies the role of reserve requirements as a macroprudential policy tool in China. In a factor-augmented vector autoregression of China, we find that banking system works as a shock absorber. To explain this “financial attenuator” effect, we extend an otherwise standard New-Keynesian model including (i) a banking sector with financial frictions with households, (ii) a credit in multi-period contracts, (iii) a central bank that conducts monetary policy by adjusting the nominal interest rate in response to the money-growth rate, and (iv) the reserve requirement (RR) as a macroprudential policy instrument. The quantitative analysis of the estimated model shows that the presence of a maturity mismatch makes a bank’s leverage less procyclical, which offsets the effects of financial frictions and makes the bank’s balance sheet function as a shock absorber. Our analysis also suggests that countercyclical RR adjustment can enhance welfare compared to fixed an RR ratio in the presence of a maturity mismatch but faces important implementation challenges. In particular, an RR policy countercyclically responding to bank lending can effectively stabilize the economy but increase financial fragility, as the “credit attenuator” effect stemming from the maturity mismatch will be offset by this policy.

Date: 2020
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/1540496X.2019.1627194 (text/html)
Access to full text is restricted to subscribers.

Related works:
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:mes:emfitr:v:56:y:2020:i:12:p:2826-2851

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/MREE20

DOI: 10.1080/1540496X.2019.1627194

Access Statistics for this article

More articles in Emerging Markets Finance and Trade from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().