Reserve Requirements and Capital Flows in Latin America

35 Pages Posted: 13 Sep 2018

See all articles by Michael Brei

Michael Brei

Université Paris Ouest - Nanterre, La Défense - EconomiX

Ramon Moreno

Independent

Date Written: August 2018

Abstract

The experience of a number of central banks in emerging economies indicates that capital flows can pose a dilemma. For example, raising policy rates can attract more capital inflows by raising deposit rates. It has been suggested, however, that raising reserve requirements instead of the policy rate can address this dilemma, as deposit rates will not necessarily increase, even if lending rates rise. To investigate this possibility, this paper examines how banks adjust loan and deposit rates in response to changes in reserve requirements. We use data on 128 banks from seven Latin American countries over the period 2000-14. Our results indicate that higher reserve requirements are associated with higher loan rates, whereas deposit rates remain unchanged during normal times and decrease during periods of large capital inflows. Reserve requirements may therefore be a way to mitigate the dilemma posed by capital inflows in some Latin American economies.

Keywords: reserve requirements, monetary policy, capital flows

JEL Classification: C53, E43, E52, G21

Suggested Citation

Brei, Michael and Moreno, Ramon, Reserve Requirements and Capital Flows in Latin America (August 2018). BIS Working Paper No. 741. Available at SSRN: https://ssrn.com/abstract=3241860

Michael Brei (Contact Author)

Université Paris Ouest - Nanterre, La Défense - EconomiX ( email )

200 Avenue de la République
Nanterre cedex, Nanterre Cedex 92000
France

Ramon Moreno

Independent ( email )

No Address Available

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