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

2

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

3

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

4

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

• 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

Interest rate movements ARE a Macroprudential tool?

55

Price stability

Micro prudential

interes

t rates

Regulation & supervisión

MONETARY POLICY REGULATION & SUPERVISION

Fitting macroprudential policy. Advanced economies

MacroprudentialPolicy

Financial Stability

goals

inst

rum

ents

On semantics. Reserve requirements as macroprudential policy

66

Price stability

Micro prudential

Regulation & supervisión

MONETARY POLICY REGULATION & SUPERVISION

Fitting Macroprudential policy. Emerging

Macroprudential Policy

Financial Stability

goals

inst

rum

ents

The shifting setting for central banks

interes

t rates

LTV caps

K requirements

Liquidity ratios

Dynamic provisions

Reserve requirement

s

back

7

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

CHN

HKG

IND

IDN

KOR

MYS

PHSSGP

THA

-6

-4

-2

0

2

4

6

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8

Monetary Policy Stance in Asia

China, May '11

Cont

racti

onEx

pans

ion

Expansion Contraction

RRR change*

Taylor rule Gap

Peru

-6

-4

-2

0

2

4

6

-3 -2 -1 0 1 2 3

MONETARY POLICY STANCE IN LATAM. MAY 2011

Brazil

ColombiaMexico

CONTRACTIONEXPANSION

CONTRACTION

EXPANSION

ChileTaylor Rule Gap

RRR increase

8

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

Peru

-6

-4

-2

0

2

4

6

-3 -2 -1 0 1 2 3

MONETARY POLICY STANCE IN LATAM

may-11 may-12

Brazil

Colombia

Mexico

CONTRACTIONEXPANSION

CONTRACTION

EXPANSION

ChileTaylor Rule Gap

RRR increaseCHN

HKG

IND

IDN

KOR

MYS

PHSSGP

THA

-6

-4

-2

0

2

4

6

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8

Monetary Policy Stance in Asia

China, May '11 China May '12

Cont

racti

onEx

pans

ion

Expansion Contraction

RRR change*

Taylor rule Gap

9

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

10

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