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

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  • Glocker, C.
  • Towbin, P.

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

Paper provided by Banque de France in its series Working papers with number 363.

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Length: 57 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bfr:banfra:363

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Keywords: Reserve Requirements; Monetary Policy; Financial Stability; Capital Flows; Business Cycle.;

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  1. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: II. Applications," NBER Working Papers 9420, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. Stephen G. Cecchetti & Lianfa Li, 2008. "Do Capital Adequacy Requirements Matter For Monetary Policy?," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 643-659, October.
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  6. Vasco Curdia & Michael Woodford, 2010. "The Central-Bank Balance Sheet as an Instrument of Monetary Policy," NBER Working Papers 16208, National Bureau of Economic Research, Inc.
  7. Alasdair Scott & Pau Rabanal & Prakash Kannan, 2009. "Monetary and Macroprudential Policy Rules in a Model with House Price Booms," IMF Working Papers 09/251, International Monetary Fund.
  8. Hernando Vargas & Carlos Varela & Yanneth R. Betancourt & Norberto Rodríguez, . "Effects of Reserve Requirements in an Inflation Targeting Regime: The Case of Colombia," Borradores de Economia 587, Banco de la Republica de Colombia.
  9. 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.
  10. David Cook & Woon Gyu Choi, 2002. "Liability Dollarization and the Bank Balance Sheet Channel," IMF Working Papers 02/141, International Monetary Fund.
  11. Pascal Towbin & Sebastian Weber, 2011. "Limits of Floating Exchange Rates," IMF Working Papers 11/42, International Monetary Fund.
  12. 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.
  13. 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.
  14. 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.
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