Low Interest Rate Policy and the Use of Reserve Requirements in Emerging Markets

Abstract

The paper sheds light on the link between the interest rate policy in large advanced economies with international funding and reserve currencies (the United States and the Euro Area) and the use of reserve requirements in emerging markets. Using reserve requirement data for 28 emerging markets from 1998 to 2012 we provide evidence that emerging market central banks tend to raise reserve requirements when interest rates in international funding markets decline or financial inflows accelerate to preserve nancial stability. In contrast, when global liquidity risk rises and funding from the large advanced economies dries up emerging markets lower reserve requirements to stabilize the banking system that is in need of liquidity.