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

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  • Christian Glocker

    (Banque de France)

  • Pascal Towbin

    (Banque de France)

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.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 8 (2012)
Issue (Month): 1 (March)
Pages: 65-114

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Handle: RePEc:ijc:ijcjou:y:2012:q:1:a:4

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  1. David Cook & Woon Gyu Choi, 2002. "Liability Dollarization and the Bank Balance Sheet Channel," IMF Working Papers 02/141, International Monetary Fund.
  2. Elekdag, Selim & Tchakarov, Ivan, 2007. "Balance sheets, exchange rate policy, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 31(12), pages 3986-4015, December.
  3. Towbin, Pascal & Weber, Sebastian, 2013. "Limits of floating exchange rates: The role of foreign currency debt and import structure," Journal of Development Economics, Elsevier, vol. 101(C), pages 179-194.
  4. Vasco Cúrdia & Michael Woodford, 2010. "The central-bank balance sheet as an instrument of monetary policy," Staff Reports 463, Federal Reserve Bank of New York.
  5. Hernando Vargas Herrera & Yanneth R Betancourt & Carlos Varela & Norberto Rodriguez, 2011. "Effects of reserve requirements in an inflation targeting regime: the case of Colombia," BIS Papers chapters, in: Bank for International Settlements (ed.), The global crisis and financial intermediation in emerging market economies, volume 54, pages 133-169 Bank for International Settlements.
  6. Carlos Montoro & Ramon Moreno, 2011. "The use of reserve requirements as a policy instrument in Latin America," BIS Quarterly Review, Bank for International Settlements, March.
  7. Faia, Ester & Monacelli, Tommaso, 2007. "Optimal interest rate rules, asset prices, and credit frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3228-3254, October.
  8. Reinhart, Carmen M & Reinhart, Vincent R, 1999. "On the Use of Reserve Requirements in Dealing with Capital Flow Problems," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 27-54, January.
  9. Michael Geiger, 2008. "Instruments Of Monetary Policy In China And Their Effectiveness: 1994–2006," UNCTAD Discussion Papers 187, United Nations Conference on Trade and Development.
  10. Rodrigo Cerda & Felipe Larraín, 2005. "Inversión Privada e Impuestos Corporativos: Evidencia para Chile," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 42(126), pages 257-281.
  11. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
  12. Prakash Kannan & Pau Rabanal & Alasdair M. Scott, 2012. "Monetary and Macroprudential Policy Rules in a Model with House Price Booms," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 16.
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Cited by:
  1. International Monetary Fund, 2012. "Credit Growth and the Effectiveness of Reserve Requirements and Other Macroprudential Instruments in Latin America," IMF Working Papers 12/142, International Monetary Fund.
  2. Michael Funke & Michael Paetz & Qianying Chen,, 2012. "Market and Non-Market Monetary Policy Tools in a Calibrated DSGE Model for Mainland China," Quantitative Macroeconomics Working Papers 21207, Hamburg University, Department of Economics.
  3. Hernando Vargas & Pamela Cardozo, 2012. "The Use of Reserve Requirements in an Optimal Monetary Policy Framework," Borradores de Economia 716i, Banco de la Republica de Colombia.
  4. Bank for International Settlements, 2012. "Operationalising the selection and application of macroprudential instruments," CGFS Papers, Bank for International Settlements, number 48.
  5. Glocker, Ch. & Towbin P., 2012. "The Macroeconomic Effects of Reserve Requirements," Working papers 374, Banque de France.
  6. Mimir, Yasin & Sunel, Enes & Taskin, Temel, 2012. "Required reserves as a credit policy tool," MPRA Paper 39613, University Library of Munich, Germany.
  7. Hernando Vargas Herrera & Pamela Cardozo, 2012. "The Use of Reserve Requirements in an Optimal Monetary Policy Framework," BORRADORES DE ECONOMIA 009824, BANCO DE LA REPÚBLICA.
  8. Tovar, Camilo & Garcia-Escribano, Mercedes & Vera, Mercedes, 2012. "El crecimiento del crédito y la efectividad de los requerimientos de encaje y otros instrumentos macroprudenciales en América Latina," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 24, pages 45-64.

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