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Reserve requirements in the brave new macroprudential world

Author

Listed:
  • Cordella, Tito
  • Federico, Pablo
  • Vegh, Carlos
  • Vuletin, Guillermo

Abstract

Using a new, large data set on quarterly reserve requirements for the period 1970-2011, this paper provides new evidence on the use of reserve requirements as a countercyclical macroprudential tool in developing countries. The appeal of reserve requirements lies in the pro-cyclical behavior of the exchange rate over the business cycle in developing countries. This enormously complicates the use of interest rates as a countercyclical instrument (because of its effect on the exchange rate) and calls for a second instrument. The paper suggests that conflicts may arise between the microprudential and macroprudential policy stances.

Suggested Citation

  • Cordella, Tito & Federico, Pablo & Vegh, Carlos & Vuletin, Guillermo, 2014. "Reserve requirements in the brave new macroprudential world," Policy Research Working Paper Series 6793, The World Bank.
    • Handle: RePEc:wbk:wbrwps:6793
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    Keywords

    Debt Markets; Emerging Markets; Currencies and Exchange Rates; Economic Theory&Research; Banks&Banking Reform;
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