The Macroeconomic Effects of Macroprudential Policy : Evidence from a Narrative Approach
This paper analyzes the macroeconomic effects of macroprudential policy—in the form of legal reserve requirements—in three Latin American countries (Argentina, Brazil, and Uruguay). To correctly identify innovations in changes in legal reserve requ...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English English |
| Published: |
World Bank, Washington, DC
2022
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/099542508242283333/IDU04a228ead0c60204e6b0b1e002a61b8860edb http://hdl.handle.net/10986/37923 |
| Summary: | This paper analyzes the macroeconomic
effects of macroprudential policy—in the form of legal
reserve requirements—in three Latin American countries
(Argentina, Brazil, and Uruguay). To correctly identify
innovations in changes in legal reserve requirements, a
narrative approach—based on contemporaneous reports from the
IMF and central banks in the spirit of Romer and Romer
(2010)—is developed in which each change is classified into
endogenous or exogenous to the business cycle. This
distinction is critical in understanding the macroeconomic
effects of reserve requirements. In particular, while output
falls in response to exogenous increases in legal reserve
requirements, it is not affected when using all changes and
relying on traditional time-identifying strategies. This
bias reflects the practical relevance of the
misidentification of endogenous countercyclical changes in
reserve requirements. The empirical frontier is also pushed
along two important dimensions. First, in measuring legal
reserve requirements, both the different types of legal
reserve requirements in terms of maturity and currency of
denomination as well as the structure of deposits are taken
in account. Second, since in practice reserve requirement
policy is tightly linked to monetary policy, the study
jointly analyze the macroeconomic effects of changes in
central bank interest rates. To properly identify exogenous
central bank interest rate shocks, the Romer and Romer
(2004) strategy is used. |
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