Comments to
Macroprudential policy over the business cycle
Enrique Alberola
BE-WB Conference Debt and credit, growth and crisis
Banco de España, Madrid
19.6.12
Intro
 Paper is a very relevant contribution….
 Cyclicality of reserve requirements (in a GDP sense)
•
Implicitly assuming stabilization properties
 Complementarity with monetary policy (interest rate movements)
 …to the core issues of an ongoing policy debate
OUTLOOK
•
Environment of financial instability, capital flows volatility
•
Slow reaction of monetary policy to the cycle (in particular to the upward phase)
•
Can it be explained by alternative tools, v.g. Reserve requirements
LONG TERM
•
Shifting paradigms in central banks
•
Links between monetary policy and financial stability (macroprudential policy)
 Comments aimed at clarification and further research
 On semantics and beyond
 On symmetry and effectiveness
2
On semantics. Reserve requirements as
macroprudential policy
 Definitions of macroprudential policy:

This paper:
“The use of prudential tools,… for macroeconomic stabilization purposes”
•
As opposed to the dicotomy macro/micro approach:
“The use of prudential tools with the explicit objective of promoting the stability of
the financial system as a whole, not of the individual institutions” BIS (2010)
“The prime objective of macroprudential policy is to limit build-up of system-wide
(systemic) financial risk” IMF (2011)
 The main objective of the paper:

Compare reserve requirements movements and monetary policy movements

Analyse complementarity or substitution
3
On semantics. Reserve requirements as
macroprudential policy
 Therefore:
Reserve requirements  Interest rates
Reserve requirements = Macroprudential tool
•
Overstretching the macroprudential concept
•
Is this an innocuous semantic question?. Not at all
•
Interest rate movements
ARE a
Macroprudential tool?
•
Central banks frameworks are under reconstruction, and these imprecisions lead to
confusion
•
Reserve requirements can be complementary because they are embedded in the
monetary transmission mechanism, via multiplier.
Reserve requirements as alternative monetary policy tool, with some
macroprudential (v.g. financial stability) impact
4
On semantics. Reserve requirements as
macroprudential policy
goals
Fitting macroprudential policy. Advanced economies
Financial
Stability
Price
stability
Macroprudential
Policy
instruments
Micro
prudential
interest
rates
MONETARY POLICY
Regulation &
supervisión
REGULATION & SUPERVISION
55
The shifting setting for central banks
goals
Fitting Macroprudential policy. Emerging
Financial
Stability
Price
stability
Macroprudential Policy
LTV caps
K requirements
Micro
prudential
Liquidity ratios
instruments
Dynamic
provisions
interest
rates
MONETARY POLICY
Reserve
requirements
Regulation &
supervisión
REGULATION & SUPERVISION
back
66
On further work. The empirical link between RR and
interest rates
 Use database to determine empirical relation between RR and interest rates

Some empirical evidence: China: 2:1; Peru 1:1 Brazil 0,75:1

Gª Escribano & Tovar (2012) analyse impact of reserves, but do not
analyse symmetries
MONETARY POLICY STANCE IN LATAM. MAY 2011
CONTRACTION
Monetary Policy Stance in Asia
China, May '11
RRR increase
Contraction
6
Brazil
4
Peru
2
Mexico
Colombia
CHN
4
2
Chile
MYS
IND
Taylor Rule Gap
0
HKG
SGP
PHS
Taylor rule Gap
THA
KOR
0
-2
IDN
-2
Expansion
-4
-6
EXPANSION
RRR change*
6
-3
EXPANSION
-2
-1
0
1
2
CONTRACTION
3
-4
-6
-8
-7
Expansion
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
Contraction
7
On further work. The empirical link between RR and
interest rates
 Use database to determine relations between RR and interest rates

Some empirical evidence China: 2:1; Peru 1:1 Brazil 0,75:1

Gª Escribano & Tovar (2012) analyse impact of reserves, but do not
analyse symmetries
MONETARY POLICY STANCE IN LATAM
may-11
CONTRACTION
Monetary Policy Stance in Asia
may-12
China, May '11
Brazil
4
Contraction
6
RRR increase
Peru
China May '12
RRR change*
6
CHN
4
2
2
Chile Colombia
0
-2
SGP
PHS
IDN
-6
-3
EXPANSION
-2
-1
0
1
2
CONTRACTION
3
Expansion
-2
-4
EXPANSION
HKG
Taylor rule Gap
THA
KOR
0
Mexico
MYS
IND
Taylor Rule Gap
-4
-6
-8
-7
Expansion
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
Contraction
8
On further work. The empirical link between RR and
interest rates
 Symmetry

Downside: fear of falling

Upside: fear of capital inflows


With the same strength? Is now more prominent the latter?
…compare both cycles
9
Final considerations
•
Large policy implications, large pending exploitation
•
Be careful when conveying the messages
• Should help to clarify the roadmap not to add confusion
•
RR and financial deepening
• Some years ago substantial reserve requirements associated with
underdeveloped banking system, bound to vanish
• Entailed costs (banking tax, financial distortions…)
• What is the view now, given its proven utility?
• Would its resilience limit banking deepening
10