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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 or national---to finance working capital. National banks provide liquidity services, while local banks have superior monitoring technologies, such that both types coexist. Relationship banking is modeled in terms of a fixed cost of switching ...