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The macroeconomic effects of macroprudential policy: Evidence from a narrative approach

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  • Rojas, Diego
  • Vegh, Carlos
  • Vuletin, Guillermo

Abstract

We analyze the macroeconomic effects of macroprudential policy – in the form of legal reserve requirements – in three Latin American countries (Argentina, Brazil, and Uruguay). To correctly identify innovations in changes in legal reserve requirements, we develop a narrative approach that classifies each change into endogenous or exogenous to the business cycle. We show that this distinction is critical in understanding the macroeconomic effects of reserve requirements. In particular, we show that output falls in response to exogenous increases in legal reserve requirements but is not affected when using all changes and relying on traditional time-identifying strategies. This bias reflects the practical relevance of the misidentification of endogenous countercyclical changes in reserve requirements.

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  • Rojas, Diego & Vegh, Carlos & Vuletin, Guillermo, 2022. "The macroeconomic effects of macroprudential policy: Evidence from a narrative approach," Journal of International Economics, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:inecon:v:139:y:2022:i:c:s0022199622000769
    DOI: 10.1016/j.jinteco.2022.103644
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    More about this item

    Keywords

    Macroprudential policy; Reserve requirements; Monetary policy; Narrative approach; Identification; Business cycle; Endogeneity; Macroeconomic effects;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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