International Finance Discussion Papers (IFDP)
June 1994
The Effect of Changes in Reserve Requirements on Investment and GNP
Prakash Loungani and Mark Rush
Abstract:
This paper provides evidence on the importance of the credit channel in the transmission of monetary policy. Changes in reserve requirements are used to measure "credit shocks." Reserve requirement changes are often made for regulatory reasons, and hence provide a more exogenous measure of credit shocks than the measures used in previous tests. To distinguish between the "money" and "credit" channels, the significance of the reserve requirements variable is studied in an empirical model that includes other monetary aggregates (either the monetary base or M1). We find that an increase in reserve requirements lowers aggregate investment, real GNP and commercial and industrial (C&I) loans made by banks.
PDF: Full Paper
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