As a matter of definition, we will refer to countries falling in cell [3,3] as using RRP as a _complement_ to monetary policy in the sense that both policies reinforce each other.<sup>22</sup> These are cases in which both RRP and monetary policy are countercyclical, so that in good (bad) times both RR and the policy interest rate are increased (lowered). In contrast, countries that fall in cell [3,2] and, potentially, cell [3,1] are cases in which RRP acts as a _substitute_ for interest rate policy because reserve requirements perform the function that the interest rate cannot, due to the need of either defending the currency in bad times or not attracting more capital inflows in good times.

Further, we interpret cell [2,1] as a “bad place” to be because here countries feel compelled to use monetary policy pro-cyclically (for reasons to be discussed below) but are not taking advantage of RR as a second instrument. On the other hand, we can view [2,3] as the “promised land,” in terms of policy making. The reason is that here countries can use monetary policy for countercyclical purposes without fearing the effects of countercyclical interest rates on the exchange rate and/or capital inflows, presumably reflecting a large degree of policy and institutional credibility.<sup>2324</sup> As before, we break the sample into before and after 2004 and construct the policy matrices for each period, as illustrated in Table 2. Comparing the pre and post-2004 policy mix matrices in Tables 2, Panels a and b, three important changes are worth noting: (i) the number of developing countries pursuing pro-cyclical interest rate policy falls from seven in the early period to just one in the more recent period; (ii) the number of developing countries engaging in countercyclical RRP increases from 7 to 15, and (iii) developing countries using monetary policy and RRP as substitutes (as captured in cell [2,2]) increases from 5 to 8, whereas developing countries using monetary policy and RRP as complements (as captured in cell [3,3]) increases from 2 to 7.

> 22 Notice that this definition of complements and substitutes only focuses on the comovement of the two policy instrument and thus should not be confused with the game theoretical concepts of strategic complementarity and substitutability _à la_ Bulow, Geanakoplos, and Klemperer (1985). 23Vegh and Vuletin (2013) formally link graduation from monetary procyclicality to institutional improvement.

24Of course, countries may still want to use RR as systemic risk-driven macroprudential policy. In theory, as well, countries might want to use both monetary policy and RR countercyclically if they feel that the monetary transmission channel of monetary policy is not strong enough. Revealed preference, however, suggests that this is not the case and that industrial countries (many of which in fact do not even have legal RR) do not feel the need to supplement monetary policy with RR. Hence, our label of “promised land” is meant to convey an observed state of affairs rather than an optimal prescription regarding the mix of monetary policy and RR in mature countries. In fact, this is clearly an area that warrants further analytical work.

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