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Credit Growth and the Effectiveness of Reserve Requirements and Other Macroprudential Instruments in Latin America

Over the past decade policy makers in Latin America have adopted a number of macroprudential instruments to manage the procyclicality of bank credit dynamics to the private sector and contain systemic risk. Reserve requirements, in particular, have been actively employed. Despite their widespread use, little is known about their effectiveness and how they interact with monetary policy. In this paper, we examine the role of reserve requirements and other macroprudential instruments and report new cross-country evidence on how they influence real private bank credit growth. Our results show that these instruments have a moderate and transitory effect and play a complementary role to monetary policy.

At this point, it is worth clarifying that given the complex structure of reserve
requirements in all countries, we rely exclusively on reserve requirement
changes to identify the policy shock. Thus rather than using an effective rate our
RR measure is based on a simple average of rates (in Brazil of demand and
savings deposits; in Colombia of checking and saving accounts, CD and bonds,
and in Peru the required rate as published by the central bank, see Figure 8).
This simple approach ...