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

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

WP/12/142

© 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: [email protected], [email protected], [email protected]

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*We thank Gustavo Adler, Paul Castillo, Luis Cubeddu, Pedro Fachada, Martin Kaufman, Charlie

Kramer, Carlos Medeiros, Sebastian Sosa, Rodrigo Valdés, Gilbert Terrier, and seminar participants at

WHD and the 2011 CEMLA Researchers Network for their comments. We also thank Madelyn Estrada

for research assistance.