Abstract
This paper analyzes the benefits and side effects of foreign-currency-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.
Authors
- Annamaria De Crescenzio
- Etienne Lepers
- Zoe Fannon
JEL codes
- E32
- E42
- E58
- E61
- E01