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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: University of Oxford

No 2021/01, OECD Working Papers on International Investment from OECD Publishing

Abstract: This paper provides the first comprehensive analysis of benefits and side-effects of foreign-currency differentiated reserve requirements for a sample of 58 countries from 1999 to 2015. Departing from the existing literature on effectiveness which used binary variables to measure policy changes, the intensity of reserve requirement adjustments is captured by using the gap between foreign and local currency rates to isolate the impact of differentiation net of volume effects.The findings show that increasing the gap between FX and local currency-denominated reserve requirements is generally effective in reducing currency mismatch and dollarisation in banks’ balance sheets, notably through a reduction in the share of banks’ FX liabilities to total liabilities and in banks’ net FX positions. The findings also show that a higher gap is associated with a broader reduction in capital inflows, in particular portfolio debt inflows and flows to non-banks. Little evidence of domestic or international circumvention, with risks shifting to other sectors or countries is visible.

Keywords: banking regulation; differentiated reserve requirement; dollarisation; macro-prudential policies (search for similar items in EconPapers)
JEL-codes: E58 F3 F38 G28 (search for similar items in EconPapers)
Date: 2021-01-20
New Economics Papers: this item is included in nep-cba and nep-mac
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