Targeted bank reserve requirements (RR), which typically favor smaller banks over larger ones, have been used by some emerging market economies for macroeconomic stabilization. We study the effectiveness of this form of policy in 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. As switching banks is costly, firms switch only under sufficiently large shocks. Our calibrated model predicts that targeted RR policies are effective for stabilizing macroeconomic fluctuations, especially under large recessionary shocks. However, they may also raise local bank leverage, increasing default risks and liquidation losses. Our model’s mechanism is supported by bank-level evidence from China.
Suggested citation:
Liu, Zheng, Mark M. Spiegel, and Jingyi Zhang. 2025. “Targeted Reserve Requirements for Macroeconomic Stabilization.” Federal Reserve Bank of San Francisco Working Paper 2023-13. https://doi.org/10.24148/wp2023-13