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Assessing the Effectiveness of Currency-Differentiated Tools: The Case of Reserve Requirements

Author

Listed:
  • Annamaria De Crescenzio

    (OECD)

  • Etienne Lepers

    (OECD)

  • Zoe Fannon

    (Somerville College, Oxford)

Abstract

This paper analyzes the benefits and side effects of foreigncurrency-differentiated reserve requirements, a widely used tool to limit currency risks. Departing from the existing macroprudential policy literature that uses binary policy variables, we study the gap between foreign- and local-currency reserve requirement rates to isolate the impact of the currency differentiation net of volume effects. First, increasing the gap appears generally effective in reducing currency mismatches and dollarization in banks’ balance sheets. Second, a higher gap is associated with a broader reduction of portfolio debt inflows and flows to non-banks. Third, we find little evidence of domestic or international circumvention.

Suggested Citation

  • Annamaria De Crescenzio & Etienne Lepers & Zoe Fannon, 2023. "Assessing the Effectiveness of Currency-Differentiated Tools: The Case of Reserve Requirements," International Journal of Central Banking, International Journal of Central Banking, vol. 19(5), pages 439-492, December.
    • Handle: RePEc:ijc:ijcjou:y:2023:q:5:a:10
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    References listed on IDEAS

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    1. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
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    4. Jérôme Vandenbussche & Ursula Vogel & Enrica Detragiache, 2015. "Macroprudential Policies and Housing Prices: A New Database and Empirical Evidence for Central, Eastern, and Southeastern Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 343-377, March.
    5. Yasin Mimir & Enes Sunel, 2019. "External Shocks, Banks, and Optimal Monetary Policy: A Recipe for Emerging Market Central Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 15(2), pages 235-299, June.
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    Cited by:

    1. Daniel Carvalho & Etienne Lepers & Rogelio Jr Mercado, 2021. "Taming the "Capital Flows-Credit Nexus": A Sectoral Approach," Trinity Economics Papers tep0921, Trinity College Dublin, Department of Economics.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts

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