Reserve Requirements in the Brave New Macroprudential World
48 Pages Posted: 20 Apr 2016
Date Written: February 1, 2014
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.
Keywords: Debt Markets, Emerging Markets, Currencies and Exchange Rates, Economic Theory & Research, Banks & Banking Reform
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