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Macroprudential Regulations in Central America

  • Alejandro Izquierdo
  • Rudy Loo-Kung
  • Liliana Rojas-Suárez

In recent years, and especially in the aftermath of the global financial crisis, a number of emerging market economies have been reforming their regulatory frameworks to adopt recommendations of the macroprudential approach. This paper discusses the potential usefulness of implementing this approach in Central America. Two major results support serious consideration of this type of policy in the region. First, credit booms in Central America are not only as pronounced as in other emerging economies, they are also associated with significantly lower economic growth during downturns. Regulations that minimize the eruption of credit booms and busts are therefore warranted. Second, simulation exercises involving two of the most popular instruments under the macroprudential approach - reserve requirements and dynamic provisioning -suggest significant potential benefits for the stability of financial systems in the region.

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Paper provided by Inter-American Development Bank in its series IDB Publications (Working Papers) with number 79538.

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Date of creation: Feb 2013
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Handle: RePEc:idb:brikps:79538
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  1. Leon, David & Quispe, Zenon, 2010. "El encaje como instrumento no convencional de Política Monetaria," Revista Moneda, Banco Central de Reserva del Perú, issue 143, pages 8-16.
  2. Reinhart, Carmen M & Reinhart, Vincent R, 1999. "On the Use of Reserve Requirements in Dealing with Capital Flow Problems," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 27-54, January.
  3. Carlos Montoro & Ramon Moreno, 2011. "The use of reserve requirements as a policy instrument in Latin America," BIS Quarterly Review, Bank for International Settlements, March.
  4. International Monetary Fund, 2010. "Peru; Staff Report for the 2010 Article IV Consultation," IMF Staff Country Reports 10/98, International Monetary Fund.
  5. Marco Terrones & Enrique G. Mendoza, 2008. "An Anatomy of Credit Booms; Evidence From Macro Aggregates and Micro Data," IMF Working Papers 08/226, International Monetary Fund.
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