City Research Online

Abstract

We propose a general equilibrium framework that highlights the interaction of reserve requirements and a conventional monetary policy in a model that combines endogenous housing loan defaults and financial intermediation frictions due to the costs of enforcing contracts. We use the model to examine how the interaction of these policies affect (i) the credit and business cycle; (ii) the distribution of welfare between savers and borrowers; (iii) the overall welfare objectives when monetary and macroprudential policies are optimised together or individually. We find that models with an optimised reserve ratio rule are effective in reducing the sudden boom and bust of credit and the business cycle. We also find that there are distributive implications of the introduction of reserve ratio where borrowers gain at the expense of savers.

Publication Type:	Article
Additional Information:	© 2022 City, University of London. Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/)
Publisher Keywords:	Reserve requirements, endogenous loan defaults, welfare
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
Departments:	School of Policy & Global Affairs > Economics

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