The Impact of Macroprudential Policies on Capital Flows in Cesee

Abstract

In line with the recent policy discussion on the use of macroprudential measures to respond to crossborder risks arising from capital flows, this paper tries to quantify to what extent macroprudential policies (MPPs) have been able to stabilize capital flows in Central, Eastern and Southeastern Europe (CESEE) -a region that experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and where policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to MPP shocks, we propose a novel regimeswitching factor-augmented vector autoregressive (FAVAR) model. It allows to capture potential structural breaks in the policy regime and to control -besides domestic macroeconomic quantities -for the impact of global factors such as the global financial cycle. Feeding into this model a novel intensity-adjusted macroprudential policy index, we find that tighter MPPs may be effective in containing domestic private sector credit growth and the volumes of gross capital inflows in a majority of the countries analyzed. However, they do not seem to generally shield CESEE countries from capital flow volatility.

Understanding Monetary Spillovers in Highly Integrated Regions: The Case of Europe*

“…Here, we draw instead on the newly proposed intensity adjusted macro‐prudential policy indicator ($$$ mp{p}_t $$$) of Eller et al . (2020), recently applied in Eller et al . (2021).…”

“…On top of that, the bulk of the literature uses rather simple indices that primarily account for the occurrence, but not for the intensity of measures (see for example Cerutti et al, 2017). Here, we draw instead on the newly proposed intensity adjusted macro-prudential policy indicator (mpp t ) of Eller et al (2020), recently applied in Eller et al (2021). We use the announcement-based indicator, which is available for the subset of countries that excludes Russia and Turkey and for the period from January 2003 to September 2019.…”

Taming the real estate boom in the EU: Pathways to macroprudential (in)action

“…Third, in order to capture stringency of the regulations and compare across EU countries, we give an intensity score to each action, closely following coding rules in Eller et al (2020) to allow for a within‐country, cross‐country, and cross‐instrument comparison in the intensity of the macroprudential stance (see coding rules in Appendix A, Table A1). This is a major contribution compared to the existing literature which coded action with binary dummies without capturing the intensity of the policy action (see Appendix A for a review).…”