Effects of Monetary and Macroprudential Policies on Financial Conditions: Evidence from the United States

Abstract

The Global Financial Crisis has reopened discussions on the role of the monetary policy in preserving financial stability. Determining whether monetary policy affects financial variables domestically-especially compared to the effects of macroprudential policiesand across borders, is crucial in this context. This paper looks into these issues using U.S. exogenous monetary policy shocks and macroprudential policy measures. Estimates indicate that monetary policy shocks have significant and persistent effects on financial conditions and can attenuate long-term financial instability. In contrast, the impact of macroprudential policy measures is generally more immediate but shorter-lasting. Also, while an exogenous increase in U.S. monetary policy rates tends to reduce credit and house prices in other countries-with the effects varying with country-specific characteristics-an increase driven by improved U.S. economic conditions tends to have the opposite effect. Finally, we do not find evidence of cross-border spillover effects associated with U.S. macroprudential policies.

Effects of Monetary and Macroprudential Policies—Evidence from Four Inflation Targeting Economies

“…For the United States, Zdzienicka et al. () estimate that a macroprudential policy tightening reduces the level of real bank credit by 1.6% after six quarters but the effect goes to zero in the long run, which is more in line with our estimates.…”

“…Furthermore, the paper adds to the literature on the interconnectedness of monetary and macroprudential policies (e.g., Claessens 2013, Smets 2014. The latter strand of research has highlighted the various links between monetary policy and financial stability: the impact of monetary policy on private-sector risk taking (e.g., Borio and Zhu 2012); a theoretical framework for leaning against credit imbalances when the central bank has a financial stability objective (Woodford 2012) and the costs of doing so (Svensson 2016); differences in the impacts of monetary and macroprudential policies on financial conditions (Zdzienicka et al 2015); and the role that monetary policy has historically played in fueling house price bubbles (e.g., Jorda, Schularick, and Taylor 2015).…”

Financial Vulnerability, Capital Flow Reversals, and Divergence Macro-Prudential Policies Posing Challenges to the ASEAN Banking Integration Framework (ABIF)

“…The authors arrived at this conclusion based on their observations of macro-prudential policies implemented in 12 Asia-Pacific countries over 2004-2013. This is supported by Zdzienicka, Chen, Kalan, Laseen, and Svirydzenka (2015), whose working paper traces monetary and macro-prudential policies in the United States from 1969 to 2008. The authors discovered that tightening measures tend to display larger effects than loosening ones.…”

“…The capital flight darkens economic prospects for the ASEAN economies and subjected them all the more vulnerable. Turning now to spillover effects of macro-prudential policies on financial sector, Zdzienicka et al (2015) discovered that the spillover impact is larger for emerging economies which rely on foreign capital. Notwithstanding varying impacts of the policy depending upon country-specific characteristics, factors such as financial integration and linkages through cross-border flows and presence of foreign-owned banks may amplify the effects, according to the authors.…”

Monetary versus Macroprudential Policies Causal Impacts of Interest Rates and Credit Controls in the Era of the UK Radcliffe Report

“…But some recent examples are Elliott et al (2013) and Zdzienicka et al (2015) for the U.S., and Monnet (2012Monnet ( , 2014a for France and Europe. Elliott et al document the extensive use of credit policies in the U.S. from the 1920s onwards.…”