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

IMF Working Papers, June 1, 2012

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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.
This paper examines the role of reserve requirements and other macroprudential instruments and reports new cross-country evidence on how they influence real private bank credit growth.

These instruments have a moderate and transitory effect on real private bank credit growth.
Macroprudential instruments play a complementary role to monetary policy in influencing credit dynamics.

Reserve requirements and other macroprudential instruments can be used alongside monetary policy to manage procyclical bank credit growth and contain systemic risk.
Given the moderate and transitory nature of their impact, these instruments are likely to be part of a broader toolkit rather than standalone long-term substitutes for monetary policy.

Bank credit, central bank, Central bank policy rate, countercyclical policy, credit, credit growth, economic activity, financial crisis, foreign exchange, Global, interest rate, interest rate spreads, Macroprudential policy instruments, marginal RR, market power, monetary transmission mechanism, private bank, prudential instrument, Reserve requirements, RR, RR measure, RR policy, RR shock, RRS need, WP