Required reserves as a credit policy tool

Yasin Mimir 1 , Enes Sunel 2 ,  and Temel Taşkın 2
  • 1 Central Bank of the Republic of Turkey, Istanbul School of Central Banking, Fener Kalamış Cad., Atlıhan Sk. No: 30/A, Kadıköy, Istanbul, Turkey
  • 2 Central Bank of the Republic of Turkey, Research and Monetary Policy Department, Istiklal Cad. No: 10 Ulus, Ankara, Turkey
Yasin Mimir, Enes Sunel and Temel Taşkın


This paper quantitatively investigates the role of reserve requirements as a credit policy tool. We build a monetary dynamic stochastic general equilibrium (DSGE) model with a banking sector in which an agency problem between households and banks leads to endogenous capital constraints for the latter. In this setup, a countercyclical required reserves ratio (RRR) rule that responds to expected credit growth is found to countervail the negative effects of the financial accelerator mechanism triggered by productivity and bank capital shocks. Furthermore, it reduces the procyclicality of the financial system compared to a fixed RRR policy regime. The credit policy is most effective when the economy is hit by a financial shock. A time-varying RRR policy reduces the intertemporal distortions created by the fluctuations in credit spreads at the expense of generating higher inflation volatility, indicating an interesting trade-off between price stability and financial stability.

  • Angelini, P., S. Neri, and F. Panetta. 2012. “Monetary and Macroprudential Policies.” European Central Bank Working Paper No. 1449.

  • Angeloni, I., and E. Faia. 2009. “A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks.” Kiel Institute for the World Economy Working Paper No. 1569.

  • Başçı, E. 2012. “The IMF.” Paper presented at the World Bank Annual Meetings, October. Central Bank of the Republic of Turkey.

  • Beau, D., L. Clerc, and B. Mojon. 2012. Macro-Prudential Policy and the Conduct of Monetary Policy. Mimeo, Banque de France.

  • Beneš, J., and K. Lees. 2010. “Multi-Period Fixed Rate Loans, Housing and Monetary Policy in Small Open Economies.” Reserve Bank of New Zealand Discussion Paper Series No. 2010-03.

  • Benigno, G., H. Chen, C. Otrok, A. Rebucci, and E. R. Young. 2010. “Revisiting Overborrowing and Its Policy Implications.” CEPR Discussion Paper No. 7872.

  • Benigno, G., H. Chen, C. Otrok, A. Rebucci, and E. R. Young. 2011. “Financial Crisis and Macro-Prudential Policies.” CEPR Discussion Paper No. 8175.

  • Bernanke, B. S., M. Gertler, and S. Gilchrist. 1999. “The Financial Accelerator in a Quantitative Business Cycle Framework.” In Handbook of Macroeconomics, edited by J. B. Taylor and M. Woodford, vol. 1C. Amsterdam: Elsevier.

  • Borio, C., and M. Drehmann. 2009. “Assessing the Risk of Banking Crises Revisited.” BIS Quarterly Review, March, 29–46.

  • BRSA. 2011. “Financial Markets Report.” Banking Regulation and Supervision Agency, vol. 24.

  • Brunnermeier, M. K., and L. H. Pedersen. 2009. “Market Liquidity and Funding Liquidity.” Review of Financial Studies 22 (6): 2201–2238.

  • Brunnermeier, M. K., and Y. Sannikov. 2011. A Macroeconomic Model with a Financial Sector. Mimeo, Princeton University.

  • CBRT. 2011. “Inflation Report.” Central Bank of the Republic of Turkey, vol. IV.

  • CBRT. 2012a. “Financial Stability Report.” Central Bank of the Republic of Turkey, vol. 14.

  • CBRT. 2012b. “Inflation Report.” Central Bank of the Republic of Turkey, vol. IV.

  • Christensen, I., C. Meh, and K. Moran. 2011. “Bank Leverage Regulation and Macroeconomic Dynamics.” Bank of Canada Working Paper No. 2011-32.

  • Christiano, L. J., M. Eichenbaum, and C. L. Evans. 2005. “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy.” Journal of Political Economy 113 (1): 1–45.

  • Cooley, T., and G. Hansen. 1989. “The Inflation Tax in a Real Business Cycle Model.” American Economic Review 79 (4): 733–748.

  • Cúrdia, V., and M. Woodford. 2010. “Credit Spreads and Monetary Policy.” Journal of Money, Credit and Banking 42 (Suppl 6): 3–35.

  • Diamond, D. W., and R. G. Rajan. 2001. “Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking.” Journal of Political Economy 109 (2): 287–327.

  • Faia, E., and T. Monacelli. 2007. “Optimal Interest Rate Rules, Asset Prices, and Credit Frictions.” Journal of Economic Dynamics and Control 31 (10): 3228–3254.

  • Gerali, A., S. Neri, L. Sessa, and F. M. Signoretti. 2010. “Credit and Banking in a DSGE Model of the Euro Area.” Journal of Money, Credit and Banking 42 (Suppl 6): 107–141.

  • Gertler, M., and P. Karadi. 2011. “A Model of Unconventional Monetary Policy.” Journal of Monetary Economics 58 (1): 17–34.

  • Gilchrist, S., and M. Saito. 2008. “Expectations, Asset Prices and Monetary Policy: The Role of Learning.” In Asset Prices and Monetary Policy, edited by J. Y. Campbell. Chicago: University of Chicago Press.

  • Gilchrist, S., and E. Zakrajšek. 2012. “Credit Supply Shocks and Economic Activity in a Financial Accelerator Model.” In Rethinking the Financial Crisis, edited by A. S. Blinder, A. W. Lo and R. M. Solow, Forthcoming, vol. 29 (2–3), 295–330. New York: Russell Sage Foundation.

  • Glocker, C., and P. Towbin. 2012. “Reserve Requirements for Price and Financial Stability: When Are They Effective?” International Journal of Central Banking 8 (1): 65–113.

  • Gray, S. 2011. “Central Bank Balances and Reserve Requirements.” IMF Working Paper No. 11/36.

  • Hancock, D., A. J. Laing, and J. A. Wilcox. 1995. “Bank Capital Shocks: Dynamic Effects on Securities, Loans, and Capital.” Journal of Banking and Finance 19 (3–4): 661–677.

  • Iacoviello, M. 2005. “House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle.” American Economic review 95 (3): 739–764.

  • Iacoviello, M. 2010. Financial Business Cycles. Mimeo, Federal Reserve Board.

  • Jeanne, O., and A. Korinek. 2010. Managing Credit Booms and Busts: A Pigouvian Taxation Approach. Mimeo, Johns Hopkins University and University of Maryland.

  • Kannan, P., P. Rabanal, and A. Scott. 2012. “Monetary and Macroprudential Policy Rules in a Model of House Price Booms.” B.E. Journal of Macroeconomics 12 (1): Art 16.

  • Kashyap, A. K., and J. C. Stein. 2012. “The Optimal Conduct of Monetary Policy with Interest on Reserves.” American Economic Journal: Macroeconomics 4 (1): 266–282.

  • Kiyotaki, N., and J. Moore. 2008. Liquidity, Business Cycles, and Monetary Policy. Mimeo, Princeton University.

  • Lim, C., F. Columba, A. Costa, P. Kongsamut, A. Otani, M. Saiyid, T. Wezel, and X. Wu. 2011. “Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences.” IMF Working Paper No. 11/238.

  • Meh, C., and K. Moran. 2010. “The Role of Bank Capital in the Propagation of Shocks.” Journal of Economic Dynamics and Control 34 (3): 555–576.

  • Mendoza, E. G., and V. Quadrini. 2010. “Financial Globalization, Financial Crises and Contagion.” Journal of Monetary Economics 57 (1): 24–39.

  • Mimir, Y. 2013. “Financial Intermediaries, Credit Shocks, and Business Cycles”. CBRT Working Paper No. 13/13.

  • Montoro, C. 2011. Assessing the Role of Reserve Requirements under Financial Frictions. Mimeo, Bank for International Settlements.

  • Montoro, C., and R. Moreno. 2011. “The Use of Reserve Requirements as a Policy Instrument in Latin America.” BIS Quarterly Review, March, 53–65.

  • Reinhart, C. M., and K. S. Rogoff. 2008. “Is the 2007 US Sub-Prime Financial Crisis So Different? An International Historical Comparison.” American Economic Review 98 (2): 339–344.

  • Smets, F., and R. Wouters. 2007. “Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach.” American Economic Review 97 (3): 586–606.

Purchase article
Get instant unlimited access to the article.
Log in
Already have access? Please log in.

Log in with your institution

Journal + Issues

The B.E. Journal of Macroeconomics publishes significant research and scholarship in theoretical and applied macroeconomics. The range of topics includes business cycle research, economic growth, and monetary economics, as well as topics drawn from the substantial areas of overlap between macroeconomics and international economics, labor economics, finance, development economics, political economy, public economics, econometric theory.