The Macroeconomic Effects of Reserve Requirements
AbstractMonetary authorities in emerging markets are often reluctant to raise interest rates when dealing with credit booms driven by capital inflows, as they fear that an increase attracts even more capital and appreciates the currency. A number of countries therefore use reserve requirements as an additional policy instrument. The present study provides evidence on their macroeconomic effects. We estimate a vector autoregressive (VAR) model for the Brazilian economy and identify interest rate and reserve requirement shocks. For both instruments a discretionary tightening leads to a decline in domestic credit. We find, however, very different effects for other macroeconomic aggregates. In contrast to interest rate policy, a positive reserve requirement shock leads to an exchange rate depreciation and an improvement in the current account, but also to an increase in prices. The results suggest that reserve requirement policy can complement interest rate policy in pursuing a financial stability objective, but cannot be its substitute with regards to a price stability objective.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Banque de France in its series Working papers with number 374.
Length: 39 pages
Date of creation: 2012
Date of revision:
Reserve Requirements; Capital flows; Monetary Policy; Business Cycle.;
Other versions of this item:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-17 (All new papers)
- NEP-CBA-2012-04-17 (Central Banking)
- NEP-IFN-2012-04-17 (International Finance)
- NEP-MAC-2012-04-17 (Macroeconomics)
- NEP-MON-2012-04-17 (Monetary Economics)
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.:
- Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010.
"Large Bayesian vector auto regressions,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
- Domenico Giannone & Martha Banbura & Lucrezia Reichlin, 2008. "Bayesian VARs with large panels," ULB Institutional Repository 2013/13388, ULB -- Universite Libre de Bruxelles.
- Martha Banbura & Domenico Giannone & Lucrezia Reichlin, 2008. "Large Bayesian VARs," Working Papers ECARES 2008_033, ULB -- Universite Libre de Bruxelles.
- Bańbura, Marta & Giannone, Domenico & Reichlin, Lucrezia, 2008. "Large Bayesian VARs," Working Paper Series 0966, European Central Bank.
- Banbura, Marta & Giannone, Domenico & Reichlin, Lucrezia, 2007. "Bayesian VARs with Large Panels," CEPR Discussion Papers 6326, C.E.P.R. Discussion Papers.
- Bernanke, Ben S. & Mihov, Ilian, 1997.
"What does the Bundesbank target?,"
European Economic Review,
Elsevier, vol. 41(6), pages 1025-1053, June.
- Fabia Aparecida de Carvalho & Cyntia F. Azevedo, 2008.
"The incidence of reserve requirements in Brazil: Do bank stockholders share the burden?,"
Journal of Applied Economics,
Universidad del CEMA, vol. 0, pages 61-90, May.
- Fabia A. de Carvalho & Cyntia F. Azevedo, 2008. "The Incidence of Reserve Requirements in Brazil: Do Bank Stockholders Share the Burden?," Working Papers Series 160, Central Bank of Brazil, Research Department.
- Horrigan, Brian R., 1988. "Are reserve requirements relevant for economic stabilization?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 97-105, January.
- Tony Takeda & Fabiana Rocha & Márcio Nakane, 2003. "The Reaction of Bank Lending to Monetary Policy in Brazil," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting] b30, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
- 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.
- Reinhart, Carmen & Reinhart, Vincent, 1999. "On the use of reserve requirements in dealing with capital flow problems," MPRA Paper 13703, University Library of Munich, Germany.
- Agustín Saade Ospina & David Pérez-Reyna, . "Cambios en los incentivos de los bancos como consecuencia de modificaciones en los esquemas de encaje," Temas de Estabilidad Financiera 041, Banco de la Republica de Colombia.
- Francisco Marcos Rodrigues Figueiredo & Roberta Blass Staub, 2002. "Evaluation and Combination of Core Inflation Measures for Brazil," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 1-20, January-J.
- Uhlig, Harald, 1994. "What Macroeconomists Should Know about Unit Roots: A Bayesian Perspective," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 645-671, August.
- Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999.
"Monetary policy shocks: What have we learned and to what end?,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
- Baumeister, Christiane & Benati, Luca, 2010. "Unconventional monetary policy and the great recession - Estimating the impact of a compression in the yield spread at the zero lower bound," Working Paper Series 1258, European Central Bank.
- 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.
- 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.
- Hernando Vargas Herrera & Carlos Varela & Yanneth R. Betancourt & Norberto Rodríguez, 2010. "Effects of Reserve Requirements in an Inflation Targeting Regime: The Case of Colombia," BORRADORES DE ECONOMIA 006710, BANCO DE LA REPÚBLICA.
- International Monetary Fund, 2011. "Policy Instruments To Lean Against The Wind In Latin America," IMF Working Papers 11/159, International Monetary Fund.
- Reinhart, Carmen & Calvo, Guillermo, 2002.
"Fear of floating,"
14000, University Library of Munich, Germany.
- Anil K. Kashyap & Jeremy C. Stein, 2012. "The Optimal Conduct of Monetary Policy with Interest on Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 266-82, January.
- Yanneth Rocío Betancourt & Hernando Vargas Herera, 2008.
"Encajes bancarios y la estrategia de inflación objetivo,"
BORRADORES DE ECONOMIA
005110, BANCO DE LA REPÚBLICA.
- Yanneth Rocío Betancourt & Hernando Vargas, . "Encajes bancarios y la estrategia de inflación objetivo," Borradores de Economia 533, Banco de la Republica de Colombia.
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
- Canova, Fabio & de Nicolo, Gianni, 2003.
"On the sources of business cycles in the G-7,"
Journal of International Economics,
Elsevier, vol. 59(1), pages 77-100, January.
- Gaston Gelos, 2006.
"Banking Spreads in Latin America,"
IMF Working Papers
06/44, International Monetary Fund.
- Prakash Loungani & Mark Rush, 1994.
"The effect of changes in reserve requirements on investment and GNP,"
International Finance Discussion Papers
471, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- Prakash Loungani & Mark Rush, 1991. "The effect of changes in reserve requirements on investment and GNP," Working Paper Series, Macroeconomic Issues 91-21, Federal Reserve Bank of Chicago.
- Glocker, C. & Towbin, P., 2012.
"Reserve Requirements for Price and Financial Stability - When Are They Effective?,"
363, Banque de France.
- Christian Glocker & Pascal Towbin, 2012. "Reserve Requirements for Price and Financial Stability: When Are They Effective?," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 65-114, March.
- Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994.
"The Capital Inflows Problem: Concepts And Issues,"
Contemporary Economic Policy,
Western Economic Association International, vol. 12(3), pages 54-66, 07.
- 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.
- Sebastian Edwards & Carlos A. Végh, 1997.
"Banks and Macroeconomic Disturbances Under Predetermined Exchange Rates,"
CEMA Working Papers: Serie Documentos de Trabajo.
115, Universidad del CEMA.
- Edwards, Sebastian & Vegh, Carlos A., 1997. "Banks and macroeconomic disturbances under predetermined exchange rates," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 239-278, October.
- Sebastian Edwards & Carlos A. Vegh, 1997. "Banks and Macroeconomics Disturbances under Predetermined Exchange Rates," NBER Working Papers 5977, National Bureau of Economic Research, Inc.
- Marvin Goodfriend & Monica Hargraves, 1983.
"A historical assessment of the rationales and functions of reserve requirements,"
83-01, Federal Reserve Bank of Richmond.
- Marvin Goodfriend & Monica Hargraves, 1983. "A historical assessment of the rationales and functions of reserve requirements," Economic Review, Federal Reserve Bank of Richmond, issue Mar, pages 3-21.
- Juan F. Rubio-Ram�rez & Daniel F. Waggoner & Tao Zha, 2010.
"Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference,"
Review of Economic Studies,
Oxford University Press, vol. 77(2), pages 665-696.
- Juan F. Rubio-Ramírez & Daniel F.Waggoner & Tao Zha, 2008. "Structural vector autoregressions: theory of identification and algorithms for inference," Working Paper 2008-18, Federal Reserve Bank of Atlanta.
- Siegel, Jeremy J, 1981. "Bank Reserves and Financial Stability," Journal of Finance, American Finance Association, vol. 36(5), pages 1073-84, December.
- Nelson Barbosa-Filho, 2008. "Inflation targeting in Brazil: 1999-2006," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(2), pages 187-200.
- Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
- Nelson Souza-Sobrinho, 2010. "Macroeconomics of bank interest spreads: evidence from Brazil," Annals of Finance, Springer, vol. 6(1), pages 1-32, January.
- Marta Bańbura, 2008.
"Large Bayesian VARs,"
2008 Meeting Papers
334, Society for Economic Dynamics.
- 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.
- 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.
- Hernando Vargas & Pamela Cardozo, 2012. "El uso de encajes en un marco de política monetaria óptima?," Borradores de Economia 716, Banco de la Republica de Colombia.
- Oğuz Esen & Ayla Oğuş Binatlı, 2013. "The Minsky Perspective on Macroprudential Policy," Working Papers wp308, Political Economy Research Institute, University of Massachusetts at Amherst.
- Cordella, Tito & Federico, Pablo & Vegh, Carlos & Vuletin, Guillermo, 2014. "Reserve requirements in the brave new macroprudential world," Policy Research Working Paper Series 6793, The World Bank.
- 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.
- 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.
- Hernando Vargas & Pamela Cardozo, 2012. "El uso de encajes en un marco de política monetaria óptima?," BORRADORES DE ECONOMIA 009745, BANCO DE LA REPÚBLICA.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie-Christine Petit-Djemad).
If references are entirely missing, you can add them using this form.