Comments to Federico, Vegh and Vuletin: ”Effects and role of macroprudential policy: Evidence from reserve requirements based on a narrative approach”

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Presentation transcript:

Comments to Federico, Vegh and Vuletin: ”Effects and role of macroprudential policy: Evidence from reserve requirements based on a narrative approach” Bent Vale, Norges Bank 30 November 2012 Views and conclusions are mine, and cannot be attributed to Norges Bank

Brief summary of paper  Monetary policy (interest rate) versus Reserve requirement policy (RRP) in financially vulnerable economies.  Show how and why just using interest rate in a ”text book” fashion to stabilize output and inflation in these economies can be difficult.  Large effects of interest rate on capital flows or exchange rates. (”fear of free falling” or ”fear of capital inflows”)

Brief summary of paper  Use a panel of 4 financially vulnerable economies (Argentina, Brazil, Columbia and Uruguay) spanning 1992 to 2011 (quarterly)  Find that RRP is used instead of interest rate in order to stabilize output.  Key to this finding is distinguishing between endogenous and exogenous RRP

Brief summary of paper  Endogenous RRP: changes in RR in response to deviations in GDP growth. Referred to as Macroprudential policy.  Exogenous RRP: changes in RRP for other purposes (financial liberalization, microprudential purposes, liquidity regulation)  Distinction is done empirically using narrative data (a la Roemer and Roemer).

Comments  Contribution: Show empirically how RRP substitutes conventional monetary policy in financially vulnerable economies.

Critical comments: Main point  Is this paper about macroprudential policy?  Macroprudential policy: policy aimed at banks to curb build-up of systemic risks during booms or making banks robust enough to maintain lending in bad times.  The endogenous RRP does not do that, it substitutes for conventional monetary policy to stabilize output.

Critical comments: Main point  Maybe instead some of the exogenous RRP changes could be considered macroprudential?  Focus on different target than GDP.  Another paper.

Critical comments: Other points  Comparing effectiveness of monetary policy and ”exogenous” RRP on GDP. But monetary policy id endogenous. Are you comparing ”apples to pears”?  Discrepancies between numbers in graphs and text.  Definition of long run?