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Reserve requirements in the brave new macroprudential world, Volume 1
 
Author:Cordella, Tito; Federico, Pablo; Vegh, Carlos; Vuletin, Guillermo; Country:World;
Date Stored:2014/02/27Document Date:2014/02/01
Document Type:Policy Research Working PaperSubTopics:Emerging Markets; Currencies and Exchange Rates; Economic Theory & Research; Debt Markets; Banks & Banking Reform
Language:EnglishRegion:The World Region
Report Number:WPS6793Collection Title:Policy Research working paper ; no. WPS 6793
Volume No:1  

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.

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