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Working Paper
Targeted Reserve Requirements for Macroeconomic Stabilization
We study the effectiveness of targeted reserve requirements (RR) as a policy tool for macroeconomic stabilization. Targeted RR adjustments were implemented in China during both the 2008-09 global financial crisis and the recent COVID-19 pandemic. We develop a model in which firms with idiosyncratic productivity can borrow from two types of banks—local and national—to finance working capital. National banks provide better liquidity services, while local banks have superior monitoring technologies. Switching lenders incurs a fixed cost, such that firms switch lenders only under sufficiently ...