Ghosh, 2012). Some exceptions include, for example, Federico _et al._ (2014) who show – using a quarterly legal reserve requirement dataset for 52 countries dating back as early as 1970 – that macroprudential policies are much more frequently changed in developing and emerging economies (on average, once every 2 years) than in industrial countries (on average, once every 12 years). In particular, they show that in developing and emerging economies, this frequent change in macroprudential policy follows a countercyclical behavior (i.e., central banks reduce reserve requirements during episodes of capital outflows and output contractions), typically acting as a substitute of monetary policy which, unlike industrial countries, is often procyclical (i.e., central bank policy interest rates increase during episodes of capital outflows and output contractions).<sup>3</sup><sup>_,_4</sup> In other words, during bad times, for example, when capital is flowing out and credibility is at a low point, monetary policy is used in a procyclical manner in order to defend the currency and fight inflationary pressures, while macroprudential policy provides a second instrument that is used for macroeconomic stabilization purposes.<sup>5</sup><sup>_,_6</sup> When focusing on the effects of macroprudential policy, most studies typically analyze the impact on domestic credit conditions (e.g., Montoro and Moreno, 2011; Terrier _et al._ , 2011; Crowe _et al._ , 2013; Lim _et al._ , 2011; Tovar _et al._ , 2012) and economic activity (e.g. Glocker and Towbin, 2012). However, the effectiveness of macroprudential policy as a macroeconomic stabilizing tool is still very much an open question.

The purpose of this paper is to contribute to the empirical literature on the macroeconomic effects of macroprudential policy, by focusing on _legal_ reserve requirements (hereafter RR). The focus on RR is only natural for three main reasons: (i) RR are arguably the most common 3 Monetary policy procyclicality occurs because during episodes of capital outflows and pressures towards large depreciations occurring typically in bad times, central banks often attempt to defend the currency by increasing the policy rate. By the same token, central banks are typically reluctant to increase policy rates in good times for fear of attracting even more capital inflows. See Vegh and Vuletin (2012) for details about this monetary policy dilemma.

> 4In fact, this has been part of the standard IMF policy advice to developing countries. To quote Stanley Fischer, at the time of the Asian Crisis the IMF’s First Deputy Managing Director “[T]he first order of business was, and still is, to restore confidence in the currency. To achieve this, countries have to make it more attractive to hold domestic currency, which, in turn, requires increasing interest rates temporarily, even if higher interest costs complicate the situation of weak banks and corporations.”

> 5This was, for example, the position of the Turkish Central Bank as described in a _Financial Times_ article on December 13th, 2010. The deputy governor argued that the way to deal with heavy capital inflows was to decrease interest rates (to reduce capital inflows and currency appreciation) while using other instruments (i.e., reserve requirements) to reduce credit growth.

> 6Naturally, in order for macroprudential policy to provide an effective second instrument, one would need to assume some imperfect substitutability between foreign and domestic assets (in order to create a wedge where a second instrument can operate), along the lines of Lahiri and Vegh (2003).

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