Eugenia Andreasen, Universidad de Chile

Paper: Capital Flow Management Measures and Dollarization

Abstract: This paper studies from an empirical and theoretical perspective the systemic and bank- level eff ects of imposing reserve requirements (RR) in foreign currency in an economy wit h a heavily dollarized fi nancial system. The paper empirically characterizes banks ’ responses to the RR carried out by the Peruvian Central Bank since 2008 with the objective of stabilizing the fi nancial market and meeting its policy targets. The results suggest that the RR is e ffective in reducing the overall level of credit in the economy and that banks ’ response in terms of credit and deposits is very heterogeneous depending on their ex ante preference for foreign funding ratio, i.e., the ratio of deposits in dollars to total loans. Motivated by the empirical insights, the paper builds a DSGE small- open- economy model with financial frictions à la Gertler -Karadi -Kiyotaki, where bank heterogeneity and financial dollarization are introduced to evaluate the eff ect iveness of the di fferential RR in reducing fi nancial dollarization and improving fi nancial resilience.