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On the Use of Reserve Requirements in Dealing with Capital Flow Problems

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Author Info
Reinhart, Carmen M
Reinhart, Vincent R

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Abstract

In recent years, many developing countries have intervened in foreign exchange markets to offset to some extent the effect on their economies of large capital flows. Often changes in reserve requirements were used to mitigate the impact of that intervention on domestic money supplies. Because reserve requirements are a tax, however, changes in reserve requirements can have real effects. This paper shows that the exact implications for output, the real exchange rate and the capital and current accounts depend importantly on who--whether depositors or borrowers--pays the tax. In any case, foreign exchange intervention matched by changes in reserve requirements that keep the money supply fixed do influence the exchange rate in the short and, sometimes, the long run. The recent experiences of ten developing countries establish that, while the incidence of the tax varies considerably across countries and time, both deposit and lending rates of interest respond to changes in reserve requirements. Copyright @ 1999 by John Wiley & Sons, Ltd. All rights reserved.

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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 4 (1999)
Issue (Month): 1 (January)
Pages: 27-54
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Handle: RePEc:ijf:ijfiec:v:4:y:1999:i:1:p:27-54

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Papazoglou, Christos & Karadeloglou, Pavlos, 1997. "Credit Market Interest Rates and Exchange Rate Dynamics," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(1), pages 73-84, January. [Downloadable!] (restricted)
  2. Graciela L. Kaminsky & Karen K. Lewis, 1996. "Does foreign exchange intervention signal future monetary policy?," Working Papers 96-7, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  3. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December. [Downloadable!] (restricted)
  4. Michael P. Dooley, 1995. "A Survey of Academic Literature on Controls over International Capital Transactions," NBER Working Papers 5352, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Baltensperger, Ernst, 1980. "Alternative approaches to the theory of the banking firm," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 1-37, January. [Downloadable!] (restricted)
  6. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994. "The capital inflows problem: Concepts and issues," MPRA Paper 13902, University Library of Munich, Germany. [Downloadable!]
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  7. Adam Bennett & María Vicenta Carkovic S. & Susan Schadler & Robert Brandon Kahn, 1993. "Recent Experiences with Surges in Capital Inflows," IMF Occasional Papers 108, International Monetary Fund.
  8. Michael L. Mussa, 1984. "Economically Sensible Solutions for Linear Rational Expectations Models with Forward and Backward Looking Dynamic Processes," NBER Working Papers 1398, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Loungani, Prakash & Rush, Mark, 1995. "The Effect of Changes in Reserve Requirements on Investment and GNP," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 511-26, May. [Downloadable!] (restricted)
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  10. Dooley, Michael P, 1996. "Capital Controls and Emerging Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 197-205, July. [Downloadable!] (restricted)
  11. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January. [Downloadable!] (restricted)
  12. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. [Downloadable!] (restricted)
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  13. Liliana Rojas-Suárez & Steven Riess Weisbrod, 1994. "Financial Market Fragilities in Latin America: From Banking Crisis Resolution to Current Policy Challenges," IMF Working Papers 94/117, International Monetary Fund.
  14. Ratna Sahay & Guillermo Calvo & Carlos A. Végh Gramont, 1995. "Capital Flows in Central and Eastern Europe: Evidence and Policy Options," IMF Working Papers 95/57, International Monetary Fund.
  15. Brock, Philip L, 1989. "Reserve Requirements and the Inflation Tax," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 106-21, February. [Downloadable!] (restricted)
  16. Sussman, Oren, 1992. "Financial Liberalization: The Israeli Experience," Oxford Economic Papers, Oxford University Press, vol. 44(3), pages 387-402, July. [Downloadable!] (restricted)
  17. Frankel, Jeffrey A & Okongwu, Chudozie, 1996. "Liberalized Portfolio Capital Inflows in Emerging Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(1), pages 1-23, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Reinhart, Carmen & Montiel, Peter, 2001. "The Dynamics of Capital Movements to Emerging Economies During the 1990s," MPRA Paper 7577, University Library of Munich, Germany. [Downloadable!]
  2. Michael Ulan, 2000. "Review Essay: Is a Chilean-Style Tax on Short-Term Capital Inflows Stabilizing?," Open Economies Review, Springer, vol. 11(2), pages 149-177, April. [Downloadable!] (restricted)
  3. Francisco F. Vázquez & Marco Arena & Carmen Reinhart, 2007. "The Lending Channel in Emerging Economies: Are Foreign Banks Different?," IMF Working Papers 07/48, International Monetary Fund. [Downloadable!]
    Other versions:
  4. Carmen M. Reinhart & Vincent R. Reinhart, 2008. "Capital Inflows and Reserve Accumulation: The Recent Evidence," NBER Working Papers 13842, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Masahiro Kawai & Richard Newfarmer & Sergio L. Schmukler, 2003. "Financial Crises: Nine Lessons From East Asia," Finance Working Papers 482, East Asian Bureau of Economic Research. [Downloadable!]
    Other versions:
  7. Robert Lavigne, 2008. "Sterilized Intervention in Emerging-Market Economies: Trends, Costs, and Risks," Discussion Papers 08-4, Bank of Canada. [Downloadable!]
  8. Natalia T. Tamirisa, 2004. "Do Macroeconomic Effects of Capital Controls Vary by Their Type? Evidence from Malaysia," IMF Working Papers 04/3, International Monetary Fund. [Downloadable!]
  9. Louis Kasekende & Damoni Kitabire & Matthew Martin, 1998. "Capital Inflows and Macroeconomic Policy in Sub-Saharan Africa," Macroeconomics 9809005, EconWPA. [Downloadable!]
  10. Graciela L. Kaminsky & Carmen M. Reinhart, 2001. "Financial Markets in Times of Stress," NBER Working Papers 8569, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Eza Al-Zein, 2008. "Reserve Requirements, the Maturity Structure of Debt, and Bank Runs," IMF Working Papers 08/108, International Monetary Fund. [Downloadable!]
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