Effectiveness of Macroprudential Policies in Developing Asia: An Empirical Analysis

Abstract

The global financial crisis highlighted the need for national bank supervisory authorities to improve surveillance systems and to detect early on the buildup of macroeconomic risks that could threaten the entire financial system. This paper presents an empirical framework for analyzing how effective macroprudential policies control credit growth, leverage growth, and housing price appreciation. Two significant findings emerge. Broadly, macroprudential policies can indeed promote financial stability in Asia. More specifically, different types of macroprudential policies are more effective against different types of macroeconomic risks.

The Behaviour of Banking Financial Stability in ASEAN‐5

“…Lee et al (2015) found that credit-related policies significantly decrease credit expansion and housing price rise, whereas liquidity-related policies effectively reduce leverage and rapid increase in housing price. Lee et al (2015) found that credit-related policies significantly decrease credit expansion and housing price rise, whereas liquidity-related policies effectively reduce leverage and rapid increase in housing price.…”

Estimating the effects of FX-related macroprudential policies in Korea

“…He concludes that a macroprudential policy shock is effective in curbing excessive credit growth and house price appreciation. Lee, Asuncion, and Kim (2015) apply the Qual VAR to investigate how effectively macroprudential policies mitigate financial stability risks in Asia. They suggest that credit-related macroprudential policy tools can be more effective in dampening credit expansion than liquidity-related macroprudential policy instruments.…”

Asian Economic Integration Report 2017:

“…These included: (i) strengthening financial supervision and macroprudential regulations to address NPLs and restore banking sector confidence, (ii) adopting measures to stem short-term capital outflows and raising interest rates to reduce investor flight, (iii) establishing more flexible exchange rate regimes, and (iv) instituting a broader set of reforms to restructure the banking sector and develop and deepen capital markets. Lee, Asuncion, and Kim (2015); Lee, Gaspar, and Villaruel (2017); Lee (2016);and Villafuerte (2017).…”