Reserve Requirements in the Brave New Macroprudential World

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 req...

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Bibliographic Details
Main Authors:	Cordella, Tito, Federico, Pablo, Vegh, Carlos, Vuletin, Guillermo
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	ADVERSE EFFECT AGENCY PROBLEMS ARBITRAGE ASYMMETRIC INFORMATION BAILOUT BANK INTEREST RATE BANK RATE BANK RISK BANKING REGULATION BANKING SECTOR BANKING SYSTEM BOOM-BUST CYCLES BUSINESS CYCLE CAPITAL ACCOUNT CAPITAL ACCOUNT OPENNESS CAPITAL CONTROLS CAPITAL FLOW CAPITAL FLOWS CAPITAL INFLOWS CAPITAL MOBILITY CAPITAL OUTFLOWS CAPITAL REQUIREMENT CAPITAL REQUIREMENTS CAPITAL STRUCTURE CASH WITHDRAWALS CENTRAL BANK CENTRAL BANKS COLLATERAL COLLECTIVE ACTION COMMODITY COMMODITY PRICES CONSUMER LOAN CONSUMER LOANS CONVERTIBILITY PLAN CREDIBILITY CREDIT CARDS CREDIT EXPANSION CREDIT GROWTH CREDIT MARKETS CURRENCY CURRENCY APPRECIATION CURRENCY CRISES CURRENCY CRISIS CURRENCY DEPRECIATION DEMAND FOR CREDIT DEPOSIT DEPOSIT INSURANCE DEPOSIT INTEREST DEPOSIT INTEREST RATES DEPOSITORS DERIVATIVE DERIVATIVE MARKETS DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPING ECONOMIES DIFFERENT CURRENCIES DOMESTIC BONDS DOMESTIC CURRENCIES DOMESTIC CURRENCY DOMESTIC-CURRENCY DUMMY VARIABLES ECONOMETRIC MODEL ECONOMIC PERFORMANCE EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET ECONOMIES EMERGING MARKETS EURO ZONE EXCHANGE ARRANGEMENTS EXCHANGE RATE EXCHANGE RATE FLUCTUATIONS EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATE SHOCKS EXCHANGE RATES EXPOSURE FEDERAL RESERVE FEDERAL RESERVE SYSTEM FINANCIAL CONTRACTS FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL FLOWS FINANCIAL INTERMEDIARIES FINANCIAL LIBERALIZATION FINANCIAL MARKET FINANCIAL STABILITY FINANCIAL SUPPORT FINANCIAL SYSTEM FINANCIAL TRANSACTIONS FISCAL POLICY FIXED EXCHANGE RATE FIXED EXCHANGE RATES FLOATING EXCHANGE RATE FOREIGN ASSETS FOREIGN CURRENCY FOREIGN DEBT FOREIGN EXCHANGE FOREIGN EXCHANGE MARKET FOREIGN EXCHANGE MARKET INTERVENTION FOREIGN EXCHANGE MARKET INTERVENTIONS FOREIGN EXCHANGE MARKETS FOREIGN INVESTORS FOREIGN RESERVE FOREIGN RESERVES GOVERNMENT SPENDING GROWTH RATE HIGH CAPITAL MOBILITY HOLDING IMPERFECT CAPITAL MOBILITY INDEPENDENT MONETARY POLICY INDUSTRIAL COUNTRIES INDUSTRIAL COUNTRY INFLATION INFLATION EXPECTATIONS INSTRUMENT INSURER INTEREST RATE INTEREST RATE POLICY INTEREST RATE SPREAD INTEREST RATE SPREADS INTEREST RATES INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL FLOWS INTERNATIONAL FINANCE INTERNATIONAL RESERVES LIMITED LIABILITIES LIMITED LIABILITY LIQUIDITY RISK LOAN PORTFOLIO MACROECONOMIC POLICY MACROECONOMIC STABILIZATION MACROECONOMIC VARIABLES MACROECONOMIC VOLATILITY MARK-TO-MARKET MARKET DISCIPLINE MARKET FAILURES MARKET LIQUIDITY MARKET MECHANISMS MARKET REQUIREMENTS MATURITIES MATURITY MATURITY MISMATCHES MINIMUM CAPITAL REQUIREMENTS MONETARY AUTHORITIES MONETARY POLICIES MONETARY POLICY MONETARY TRANSMISSION MORAL HAZARD MORAL SUASION MULTIPLE EXCHANGE RATES NEGATIVE SHOCKS NOMINAL DEPRECIATION NOMINAL EXCHANGE RATE NOMINAL EXCHANGE RATES OLIGOPOLY OPEN CAPITAL ACCOUNT OPEN ECONOMY OUTPUT OUTSTANDING CREDIT OVERSEAS BORROWING PERFECT CAPITAL MOBILITY POLICY RESPONSE POLICY RESPONSES POLITICAL ECONOMY PORTFOLIO PORTFOLIO INVESTMENTS PORTFOLIO RISK PRIVATE CREDIT PRIVATE CREDIT GROWTH PROFIT OPPORTUNITIES PRUDENTIAL REGULATION PUBLIC DEBT RATE OF DEPRECIATION REAL ESTATE REAL ESTATE LOANS REAL EXCHANGE RATE RECESSION REGULATOR REGULATORS REGULATORY FRAMEWORK RESERVE RESERVE REQUIREMENT RESERVE REQUIREMENTS RESERVES RETURN RETURNS RISK WEIGHTS SAVINGS SCATTER PLOT SHORT MATURITY SHORT-TERM BANK DEPOSITS SHORT-TERM CAPITAL SHORT-TERM INTEREST RATES SPOT MARKET STANDARD DEVIATION SYSTEMIC RISK SYSTEMIC RISKS TAX TAXATION POLICY TERM DEPOSITS TIME DEPOSITS TRUST FUND VOLATILE CAPITAL WARRANTS WHOLESALE FUNDING
Online Access:	http://documents.worldbank.org/curated/en/2014/02/19154999/reserve-requirements-brave-new-macroprudential-world http://hdl.handle.net/10986/17302

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Summary:	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.

Reserve Requirements in the Brave New Macroprudential World

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