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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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

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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”)

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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

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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).

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Comments

 Contribution: Show empirically how RRP substitutes conventional

monetary policy in financially vulnerable economies.

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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.

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Critical comments: Main point

 Maybe instead some of the

exogenous RRP changes could be considered macroprudential?

 Focus on different target than GDP.

 Another paper.

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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?