The International Aspects of Macroprudential Policy

Abstract

Countries are using macroprudential tools more actively with the goal of improving the resilience of their broader financial systems. A growing body of evidence suggests that these tools can accomplish specific domestic goals and should reduce country vulnerability to many domestic and international shocks. The evidence also suggests, however, that these policies are not an elixir. They will not insulate economies from volatility and they generate leakages to the nonbank financial system and spillovers through international borrowing, lending and other crossborder exposures. Some of these unintended consequences can mitigate the effectiveness of macroprudential policies and generate new vulnerabilities and risks. The "Corona Crisis" provides a lens to evaluate the effectiveness of current macroprudential regulations during a period of extreme market volatility and economic stress. Experience to date suggests that macroprudential tools provide some benefits and can help achieve certain macroeconomic goals, but they have limitations and expectations of what they can accomplish must be realistic.

Loose Financial Conditions, Rising Leverage, and Risks to Macro-Financial Stability

“…Another recent literature considers the role of macroprudential regulations. Several studies find evidence that tighter macroprudential policy is associated with lower future growth in domestic credit, particularly household credit (Cerutti, Claessens, and Laeven 2017;and Forbes 2020). Alam and others (2019) find that two types of measures targeting households-loan-to-value (LTV) and debt-service-to-income (DSTI) ceilings-slow down their debt accumulation.…”

Spillovers at the Extremes: The Macroprudential Stance and Vulnerability to the Global Financial Cycle

“…3 This includes theoretical models of the optimal use of macroprudential policy (i.e., Bianchi and Mendoza, 2018;Brunnermeier et al, 2013;Claessens, 2015;and Engel, 2016) and empirical assessments of the effectiveness of various tools. This empirical literature (summarized in Araujo et al, 2020 andForbes, 2021) generally finds that macroprudential policy can address specific vulnerabilities (such as reducing credit growth or FX exposures), provide somewhat more independence for monetary policy (i.e., Bergant et al, 2020), and possibly reduce the variance of growth (although at the expense of slightly slower shortterm growth). The papers that assess whether macroprudential regulations affect capital flows generally find insignificant effects on the volume of flows, but stronger evidence that they can affect the composition of flows (i.e., duration and/or type of capital flow).…”

“…11 Although the iMaPP data only report the instance of macroprudential adjustment (except LTV ratios) and not each country's overall macroprudential stance, it is possible to construct a proxy for the stance by aggregating the changes in each country's policies since 2000-a year when the use of these tools was limited, so each country can be assumed to start from a similar, neutral stance. Adopting this approach (also used in Bergant et al, 2020 andForbes, 2021), we construct a measure of each country's macroprudential policy stance each month. The resulting stances range from -7 to 72 across 72 countries, with a higher value indicating a tighter stance and a panel median of 0 and mean of 2.3.…”

Macroprudential Policy during COVID-19: The Role of Policy Space

“…The evidence on whether macroprudential tools can accomplish their ultimate goals of strengthening the resilience of financial systems to shocks and mitigating amplification effects is 2 supportive on net, but more tenuous, partly due to the limited business cycle downturns and financial crises since these tools were widely used. Several papers have also argued that although adjustments in macroprudential policy have been positive, implementation has been slow and more limited than would be required to provide meaningful protection (see Edge and Liang, 2017;Forbes, 2021;and Hanson et al, 2011). Moreover, although the direct effects, spillovers and leakages from macroprudential policies suggest they should be coordinated with other policy tools (Agénor and Pereira da Silva, 2018;Bruno et al, 2017;Forbes et al, 2017;and Richter et al, 2019), there is little evidence to date on whether this is occurring.…”

“…For evidence on the international spillovers of macroprudential policies, seeAgénor et al (2017), Agénor and Pereira da Silva (2019),Ahnert et al (2021),Aiyar et al (2014),Avdjiev et al (2016),Buch and Goldberg (2017),Forbes (2021) andReinhardt and Sowerbutts (2015).23 For evidence on the spillovers to non-bank financial entities, seeChari et al (2021) andForbes (2021). Also seeBertaut et al (2021) for evidence from the mutual fund sector on how vulnerabilities in the non-bank financial sector can amplify the impact of global shocks.…”