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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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    Cited by:

    1. Primus, Keyra, 2017. "Excess reserves, monetary policy and financial volatility," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 153-168.
    2. Fungáčová, Zuzana & Nuutilainen, Riikka & Weill, Laurent, 2016. "Reserve requirements and the bank lending channel in China," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 37-50.
    3. Agénor, Pierre-Richard & Alper, Koray & Pereira da Silva, Luiz, 2018. "External shocks, financial volatility and reserve requirements in an open economy," Journal of International Money and Finance, Elsevier, vol. 83(C), pages 23-43.
    4. Richter, Björn & Schularick, Moritz & Shim, Ilhyock, 2019. "The costs of macroprudential policy," Journal of International Economics, Elsevier, vol. 118(C), pages 263-282.
    5. Fendoğlu, Salih, 2017. "Credit cycles and capital flows: Effectiveness of the macroprudential policy framework in emerging market economies," Journal of Banking & Finance, Elsevier, vol. 79(C), pages 110-128.
    6. Crespo Cuaresma, Jesus & von Schweinitz, Gregor & Wendt, Katharina, 2019. "On the empirics of reserve requirements and economic growth," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 253-274.
    7. Chen, Minghua & Wu, Ji & Jeon, Bang Nam & Wang, Rui, 2017. "Monetary policy and bank risk-taking: Evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 31(C), pages 116-140.
    8. Glocker, Christian, 2019. "Do reserve requirements reduce the risk of bank failure?," MPRA Paper 95634, University Library of Munich, Germany.
    9. Baumeister, Christiane & Hamilton, James D., 2020. "Drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions," Journal of International Money and Finance, Elsevier, vol. 109(C).
    10. Ely, Regis Augusto & Tabak, Benjamin Miranda & Teixeira, Anderson Mutter, 2019. "Heterogeneous effects of the implementation of macroprudential policies on bank risk," MPRA Paper 94546, University Library of Munich, Germany.
    11. Becker, Chris & Ossandon Busch, Matias & Tonzer, Lena, 2020. "Macroprudential policy and intra-group dynamics: The effects of reserve requirements in Brazil," IWH Discussion Papers 21/2017, Halle Institute for Economic Research (IWH).
    12. Björn Richter & Moritz Schularick & Ilhyock Shim, 2018. "The macroeconomic effects of macroprudential policy," BIS Working Papers 740, Bank for International Settlements.
    13. Vinhado, Fernando da Silva & Divino, Jose Angelo, 2019. "Interactions between monetary and macroprudential policies in the transmission of discretionary shocks," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    14. Victor Pontines, 0. "The real effects of loan-to-value limits: empirical evidence from Korea," Empirical Economics, Springer, vol. 0, pages 1-40.
    15. Michaela Posch & Stefan W. Schmitz & Katharina Steiner & Eva Ubl, 2019. "The case for macroprudential policy as a stabilizing tool for the euro area," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q1-Q2/19, pages 124-138.
    16. Carlos Alberto Takashi Haraguchi & Jose Angelo Divino, 2020. "Monetary Policy and Reserve Requirements in a Small Open Economy," Working Papers Series 514, Central Bank of Brazil, Research Department.
    17. Christian Glocker & Werner Hölzl, 2019. "Assessing the Economic Content of Direct and Indirect Business Uncertainty Measures," WIFO Working Papers 576, WIFO.

    More about this item

    Keywords

    Reserve requirements; Capital flows; Central bank policy; Macroprudential policy; Business cycle;

    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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