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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 FRB Atlanta Working Paper No. 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. 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.
    6. Kraay, Aart & Ventura, Jaume, 1997. "Current accounts in debtor and creditor countries," Policy Research Working Paper Series 1825, The World Bank.
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    11. Cothren, Richard D & Waud, Roger N, 1994. "On the Optimality of Reserve Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 827-38, November.
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    16. P.R. Agenor & J. Aizenman & A. Hoffmaister, 2000. "The Credit Crunch in East Asia: What can Bank Excess Liquid Assets Tell us?," NBER Working Papers 7951, National Bureau of Economic Research, Inc.
    17. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
    18. Anil K. Kashyap & Jeremy C. Stein, 1997. "The role of banks in monetary policy: a survey with implications for the European Monetary Union," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 2-18.
    19. 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.
    20. Baltensperger, Ernst, 1974. "The Precautionary Demand for Reserves," American Economic Review, American Economic Association, vol. 64(1), pages 205-10, March.
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