The Interaction Between Macroprudential Policy and Monetary Policy: Overview

Abstract

This paper presents the main findings of an International Banking Research Network initiative examining the interaction between monetary policy and macroprudential policy in determining international bank lending. We give an overview on the data, empirical specifications and results of the seven papers from the initiative. The papers are from a range of core and smaller advanced economies, and emerging markets. The main findings are as follows. First, there is evidence that macroprudential policy in recipient countries can partly offset the spillover effects of monetary policy conducted in core countries. Meanwhile, domestic macroprudential policy in core countries can also affect the cross-border transmission of domestic monetary policy via lending abroad, by limiting the increase in lending by less strongly capitalised banks. Second, the findings highlight that studying heterogeneities across banks provides complementary insights to studies using more aggregate data and focusing on average effects. In particular, we find that individual bank characteristics such as bank size or G-SIB status play a first-order role in the transmission of these policies. Finally, the impacts differ considerably across prudential policy instruments, which also suggests the importance of more granular analysis.

Home sweet host: A cross‐country perspective on prudential and monetary policy spillovers through global banks

“…In line with the IBRN project as a whole (see Bussière et al, 2020), monetary policy changes are measured by an estimated structural shock from a VAR identified using high‐frequency monetary policy surprises three months ahead (updating Gertler & Karadi, 2015). By construction, the policy shock should not capture the systematic component of monetary policy; as a result, the US monetary policy shock is positive (i.e., signals tightening) at times during the global financial crisis of 2008–2009, presumably because the dismal economic conditions would have warranted even more easing than the Federal Reserve provided at the time.…”

Macroprudential policy and the inward transmission of monetary policy: The case of Chile, Mexico, and Russia

“…In our second strategy, we follow closely Gertler and Karadi (2015) and use the monetary surprises as external instrumental variables (Mertens & Ravn, 2013; Stock & Watson, 2012) to identify monetary policy shocks within a SVAR framework (see Bussière et al., 2020a).…”

“…This section presents the empirical strategy we follow to analyze the role of monetary and prudential policy interactions. In particular, we focus on whether the domestic prudential policy stance shields local banks’ credit markets from international monetary policy spillovers (see Bussière et al., 2020a).…”

“…Foreign monetary policy may affect the domestic supply of banking credit via several channels, as has been discussed in the literature (see Bussière et al., 2020a). In the case of the emerging market economies, using syndicated loan data, Bräuning and Ivashina (2017) shows how the differential between an emerging market economy policy rate and that of the United States affects the extension of credit to that emerging market economy, an outward spillover.…”

The transmission of bank capital requirements and monetary policy to bank lending in Germany

“…We analyze the effects of the euro area monetary policy stance accounting for the transmission of changes in bank capital requirements. To this aim, we follow the overall specification and modeling choices of the other papers included in this special issue, as summarized in Bussière et al (2020). As a measure for the monetary policy stance, we use the cumulative changes of the interbank money market interest rate over the previous year.…”