This paper conducts a quantitative investigation of the role of reserve requirements as a macroprudential policy tool. We build a monetary DSGE model with a banking sector in which (i) an agency problem between households and banks leads to endogenous capital constraints for banks in obtaining funds from households, (ii) banks are subject to time-varying reserve requirements that countercyclically respond to expected credit growth, (iii) households face cash-in-advance constraints, requiring them to hold real balances, and (iv) standard productivity and money growth shocks are two sources of aggregate uncertainty. We calibrate the model to the Turkish economy which is representative of using reserve requirements as a macroprudential policy tool recently. We also consider the impact of financial shocks that affect the net worth of financial intermediaries. We find that (i) the time-varying required reserve ratio rule countervails the negative effects of the financial accelerator mechanism triggered by adverse macroeconomic and financial shocks, (ii) in response to TFP and money growth shocks, countercyclical reserves policy reduces the volatilities of key real macroeconomic and financial variables compared to fixed reserves policy over the business cycle, and (iii) a time-varying reserve requirement policy is welfare superior to a fixed reserve requirement policy. The credit policy is most effective when the economy is hit by a financial shock. Time-varying required reserves policy reduces the intertemporal distortions created by the credit spreads at expense of generating higher inflation volatility, indicating an interesting trade-off between price stability and financial stability.

Emerging economies display considerable inequality in monetary asset holdings, rendering the recent disinflation nontrivial. Using a small openeconomy model with uninsurable idiosyncratic risk, this paper shows that a gradual decline of 12% in the quarterly inflation rate leads to an aggregate welfare gain of 0.40% in consumption equivalent terms. The poor gain less than the economy on aggregate, despite holding a more inflation-prone financial portfolio. This is because unequal cash holdings make inflation tax payments of the poor much smaller than those of the rich. When inflation tax revenues finance redistributive transfers that provide insurance, cross-sectional gains become even more dispersed.JEL codes: D31, E52, F41

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