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Reserve requirements as a financial stability instrument

Author

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  • Carlos Cantú
  • Rocío Gondo
  • Berenice Martinez

Abstract

We quantify the trade-offs of using reserve requirements (RR) as a financial stability tool. A tightening in RR reduces the amplitude of the credit cycle. This lowers the frequency and strength of financial stress episodes but at a cost of lower growth in credit and economic activity. We find that the gains from a lower probability and magnitude of financial stress episodes are greater than the costs from the initial reduction in economic activity. In addition, we find that RR have a stronger effect on emerging market economies than in advanced economies, both in terms of costs and benefits. Finally, we find that uniform RR have a stronger effect than RR that differenciate by maturity or currency.

Suggested Citation

  • Carlos Cantú & Rocío Gondo & Berenice Martinez, 2024. "Reserve requirements as a financial stability instrument," BIS Working Papers 1182, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1182
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    More about this item

    Keywords

    reserve requirements; macroprudential policy; financial stress episodes; early-warning system; financial cycle;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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