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Reserve requirements, bank runs, and optimal policies in small open economies

  • Eduardo J.J. Ganapolsky
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    This paper rationalizes as the outcome of an optimal policy decision the pattern of reserve requirements and other macroeconomic variables in the aftermath of a bank run. The paper develops a general equilibrium model that departs from the standard small open economy (SOE) model in three dimensions: (i) capital mobility is not perfect, (ii) there exists a costly banking system, and (iii) there is an externality affecting individual banks’ decisions. The results suggest that the path of reserve requirements would depend on the type of shock that the economy receives and the effect that this shock produces on the interest rate. Interestingly, the size of the risk premium will affect the reaction of the economy to the shock. It is also shown that the dynamic adjustment will be slightly different for permanent and temporary shocks, and it will also depend on the access that the economy has to foreign funds.

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    Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2003-39.

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    Date of creation: 2003
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    Handle: RePEc:fip:fedawp:2003-39
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    5. Baltensperger, Ernst, 1974. "The Precautionary Demand for Reserves," American Economic Review, American Economic Association, vol. 64(1), pages 205-10, March.
    6. Agenor, Pierre-Richard & Aizenman, Joshua & Hoffmaister, Alexander, 2000. "The credit crunch in East Asia : what can bank excess liquid assets tell us ?," Policy Research Working Paper Series 2483, The World Bank.
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    9. Sergio Rebelo & Carlos A. Vegh, 2006. "When Is It Optimal to Abandon a Fixed Exchange Rate?," NBER Working Papers 12793, National Bureau of Economic Research, Inc.
    10. Jeremy C. Stein, 1998. "An Adverse-Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 466-486, Autumn.
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    16. Santomero, Anthony M, 1984. "Modeling the Banking Firm: A Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 576-602, November.
    17. Roque B. Fernandez & Pablo E. Guidotti, 1996. "Regulating the banking industry in transition economies: Exploring interactions between capital and reserve requirements," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 1(1), pages 109-134.
    18. Javier Diaz-Gimenez & Edward C. Prescott & Terry Fitzgerald & Fernando Alvarez, 1992. "Banking in computable general equilibrium economies," Staff Report 153, Federal Reserve Bank of Minneapolis.
    19. Harberger, Arnold C, 1980. "Vignettes on the World Capital Market," American Economic Review, American Economic Association, vol. 70(2), pages 331-37, May.
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    21. Amartya Lahiri & Carlos A. Vegh, 2003. "Delaying the Inevitable: Interest Rate Defense and Balance of Payments Crises," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 404-424, April.
    22. Eduardo J.J. Ganapolsky, 2003. "Optimal fear of floating: the role of currency mismatches and fiscal constraints," Working Paper 2003-31, Federal Reserve Bank of Atlanta.
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