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Reserve requirements as a macroprudential instrument – Empirical evidence from Brazil

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  • Glocker, Christian
  • Towbin, Pascal

Abstract

Emerging market central banks are often reluctant to raise interest rates when facing credit booms driven by capital inflows, and they instead use reserve requirements as an additional instrument. We compare the macroeconomic effects of interest rate and reserve requirement shocks by estimating a structural vector autoregressive model for Brazil. For both instruments, discretionary tightening results in a credit decline. Contrary to an interest rate shock, however, a positive reserve requirement shock leads to an exchange rate depreciation, a current account improvement, and an increase in prices. The different effects highlight the role of reserve requirement policy as a complement to rather than a substitute for interest rate policy. The results support the bank lending channel as the main transmission mechanism for reserve requirement policy.

Suggested Citation

  • Glocker, Christian & Towbin, Pascal, 2015. "Reserve requirements as a macroprudential instrument – Empirical evidence from Brazil," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 158-176.
    • Handle: RePEc:eee:jmacro:v:44:y:2015:i:c:p:158-176
    DOI: 10.1016/j.jmacro.2015.02.007
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    More about this item

    Keywords

    Reserve requirements; Capital flows; Central bank policy; Macroprudential policy; Business cycle;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • 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

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