Reserve requirements an effective tool to balance capital flows – BIS research
Higher interest rates encourage more inflows, but adjustments in reserve requirements can strike a better balance
Adjustments in reserve requirements have been more effective than higher interest rates in balancing capital flows and credit growth in Latin America, says a working paper published by the Bank for International Settlements.
In Reserve requirements and capital flows in Latin America, Michael Brei and Ramon Moreno study data from 128 banks in seven countries over the period from 2000–2014.
The authors find “banks respond to higher reserve requirements by raising loan rates, but they tend to
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