Working Paper: CEPR ID: DP15274
Authors: Jos Luis Peydr; Rodrigo Gonzalez; Jo o Barata R. Blanco Barroso; Bernardus Van Doornik
Abstract: We show that countercyclical liquidity policy smooths credit supply cycles, with stronger crisis effects. For identification, we exploit the Brazilian supervisory credit register and liquidity policy changes on reserve requirements, that affected banks differentially and have a monetary and prudential purpose. Liquidity policy strongly attenuates both the credit crunch in bad times and high credit supply in booms. Strong economic effects are twice as large during the crisis easing than during the boom tightening. Finally, in crises, liquidity easing: increase less credit supply by more financially constrained banks; and collateral requirements increase substantially, especially by banks providing higher credit supply.
Keywords: liquidity; reserve requirements; credit cycles; macroprudential; monetary policy
JEL Codes: E51; E52; E58; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Countercyclical liquidity policy (E52) | smooths credit supply cycles (E51) |
| 1 percentage point (pp) decrease in RR during the Global Financial Crisis (GFC) (F62) | 1.03 pp increase in total credit availability (E51) |
| 1 pp increase in RR in boom times (E31) | 0.50 pp decrease in credit availability (E51) |
| liquidity easing (E51) | increases credit supply less for more financially constrained banks (E51) |
| Collateral requirements increase during crises (F65) | risk compensation mechanism (J33) |
| economic effects during crisis easing (E44) | larger than during boom tightening (E32) |