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Countercyclical reserve requirements in a heterogeneous-agent and incomplete financial markets economy

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  • Bustamante, Christian
  • Hamann, Franz

Abstract

For a long time reserve requirements fell into disuse as a countercyclical monetary policy tool. Recently, while developed countries struggled to deal the financial crisis, several emerging countries resorted to them as part of the macro-prudential policy toolkit. The apparent success of such non-conventional instruments in mitigating business cycle fluctuations raises the question whether they deserve full credit for that or some merit should be given to conventional instruments, like short-term interest rates. To answer this question, we use a dynamic stochastic general equilibrium model with risk-averse financial intermediaries, heterogeneous agents facing uninsurable idiosyncratic risk and a central bank that implements countercyclical policy using two instruments: short-term rates and reserve requirements. In this environment, in which agents’ wealth matters for their consumption and savings decisions, we find that using reserve requirements as a countercyclical tool marginally helps to reduce the consumption volatility and that its effect becomes quantitatively relevant only if banks are sufficiently risk averse. Two factors drive our results: the presence of interest rate risk and the imperfect substitution between bank liabilities.

Suggested Citation

  • Bustamante, Christian & Hamann, Franz, 2015. "Countercyclical reserve requirements in a heterogeneous-agent and incomplete financial markets economy," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 55-70.
  • Handle: RePEc:eee:jmacro:v:46:y:2015:i:c:p:55-70 DOI: 10.1016/j.jmacro.2015.08.002
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    References listed on IDEAS

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    Cited by:

    1. João Barata R B Barroso & Rodrigo Barbone Gonzalez & Bernardus F Nazar Van Doornik, 2017. "Credit supply responses to reserve requirement: loan-level evidence from macroprudential policy," BIS Working Papers 674, Bank for International Settlements.

    More about this item

    Keywords

    Monetary policy; Reserve requirements; Dynamic general equilibrium;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • 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

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