Second—and to be as substantive and novel as possible—we wanted our analysis to be based on long and comparable time series for a large number of countries, both industrial and developing, and RR are the only instrument for which it was possible (although not without a lot of hard work) to put together such an extensive and novel data set.

To this effect, we have put together a data set on quarterly _legal_ reserve requirements for 52 countries (15 industrial and 37 developing countries) for the period 1970-2011.<sup>1112</sup> This novel data set, together with more readily available data on credit, international reserves, GDP, and other macroeconomic series will allow us to identify a series of stylized facts regarding the use of RR as a macroeconomic stabilization tool. Based on these stylized facts, we can then proceed to provide a policy rationalization for what we have observed and for the relation between reserve requirement policies (RRP), monetary policy and foreign exchange market intervention.

This working paper proceeds as follows. Based on Federico, Vegh, and Vuletin (2013a), section 2 documents the key stylized facts regarding the use of reserve requirements as a macroeconomic stabilization tool and how RRP relates to the level of credit, monetary policy, and foreign exchange market intervention. We first propose an operational definition to distinguish countries that make use of RR as a stabilization tool (which we dubbed “active countries”) from those that do not (“passive countries”). We show that developing countries are much more likely to pursue an active RRP than industrial countries. This is particularly true in the post-2004 period, which is consistent with the casual observation of the increasing reliance on macroprudential policy in emerging markets. We then show that, within active countries, the level of credit to GDP is an important determinant of how countercyclical is the use of RR.

We then analyze the relation of RRP with monetary policy. Our starting observation is the fact that, unlike industrial countries, many emerging markets have not used interest rates countercyclically (i.e., to smooth out the business cycle). We will interpret this as reflecting the need to defend the currency in bad times (for fear of a sudden and perilous depreciation) and the fear of attracting yet more capital inflows in good times (by making domestic-currency assets more attractive). In order to understand the simultaneous choice of RRP and monetary policy, we then build what we call “policy mix matrices” to illustrate all the possible combinations of RRP and monetary policy in terms of their cyclical properties (pro-cyclical, a-cyclical, and countercyclical).

11For convenience, we will use the term “countries” but notice that our list includes the Euro zone as a single economic unit and Ecuador as two distinct economic units (before and after full dollarization in the year 2000). The reader is referred to Federico, Vegh, and Vuletin (2013a) for the list of countries, sample periods, and data sources.

12 Notice that we are interested in the _legal_ reserve requirement rate as opposed to the _effective_ or _average_ reserve requirements because the latter would be highly sensitive to the business cycle (as deposits correlate positively with the business cycle) and would thus not be a good indicator of the cyclical stance of reserve requirement policy.

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