Optimal Bank Reserve Remuneration and Capital Control Policy / Chun-Che Chi, Stephanie Schmitt-Grohé, Martín Uribe.

Format:

Book

Author/Creator:

Chi, Chun-Che.

Contributor:

National Bureau of Economic Research.

Schmitt-Grohé, Stephanie.

Uribe, Martín.

Series:

Working Paper Series (National Bureau of Economic Research) no. w29473.

NBER working paper series no. w29473

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

A central prediction of open economy models with a pecuniary externality due to a collateral constraint is that the unregulated economy overborrows relative to what occurs under optimal policy. A maintained assumption in this literature is that households borrow directly from foreign lenders. This paper shows that if foreign lending is intermediated by domestic banks and the government has access to capital controls and interest on bank reserves, the unregulated economy underborrows. The optimal bank reserve policy is countercyclical. By increasing bank reserves during contractions, the government acts as a lender of last resort to collateral-constrained households.

Notes:

Print version record

November 2021.