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

Both cross-border and domestic bank credit are (generally) denominated in multiple currencies. The BIS international banking statistics in combination with domestic bank credit data from the IMF’s International Financial Statistics, along with some assumptions, yield an estimate of the currency breakdown of total credit to non-banks (either including or excluding bank credit to governments) in a particular country. This breakdown allows us to express credit stocks at constant exchange rates (in this particular case, end-Q2 2011 rates). This, in turn, yields credit growth rates that are (largely) undistorted by exchange rate movements and thus provides a better measure of credit growth | WP 12 142 Credit Growth and the Effectiveness of Reserve Requirements and Other Macroprudential Instruments in Latin America Camilo E. Tovar Mercedes Garcia-Escribano and Mercedes Vera Martin INTERNATIONAL MONETARY FUND 2012 International Monetary Fund WP 12 142 IMF Working Paper Western Hemisphere Department Credit Growth and the Effectiveness of Reserve Requirements and Other Macroprudential Instruments in Latin America Prepared by Camilo E. Tovar Mercedes Garcia-Escribano and Mercedes Vera Martin Authorized for publication by Charles Kramer June 2012 This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author s and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author s and are published to elicit comments and to further debate. Abstract 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. JEL Classification Numbers E58 G21 G28. Keywords Reserve requirements countercyclical policy credit monetary transmission mechanism interest rate spreads. E-Mail Addresses ctovar@ mgarciaescribano@ mveramartin@ We thank Gustavo Adler Paul Castillo Luis Cubeddu Pedro Fachada Martin Kaufman Charlie Kramer Carlos Medeiros Sebastian Sosa Rodrigo Valdés Gilbert Terrier and .

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