The Macroeconomic Effects of Reserve Requirements

39 Pages Posted: 5 Apr 2012

Date Written: April 1, 2012


Monetary authorities in emerging markets are often reluctant to raise interest rates when dealing with credit booms driven by capital inflows, as they fear that an increase attracts even more capital and appreciates the currency. A number of countries therefore use reserve requirements as an additional policy instrument. The present study provides evidence on their macroeconomic effects. We estimate a vector autoregressive (VAR) model for the Brazilian economy and identify interest rate and reserve requirement shocks. For both instruments a discretionary tightening leads to a decline in domestic credit. We find, however, very different effects for other macroeconomic aggregates. In contrast to interest rate policy, a positive reserve requirement shock leads to an exchange rate depreciation and an improvement in the current account, but also to an increase in prices. The results suggest that reserve requirement policy can complement interest rate policy in pursuing a financial stability objective, but cannot be its substitute with regards to a price stability objective.

Keywords: Reserve Requirements, Capital flows, Monetary Policy, Business Cycle

JEL Classification: E58, E52, F32, F41

Suggested Citation

Glocker, Christian and Towbin, Pascal, The Macroeconomic Effects of Reserve Requirements (April 1, 2012). Banque de France Working Paper No. 374, Available at SSRN: or

Christian Glocker

Banque de France ( email )


Pascal Towbin (Contact Author)

Banque de France ( email )


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