Examining macroprudential policy and its macroeconomic effects - some new evidence

Focus

Recent years have seen an increasing use of macroprudential policy to mitigate systemic risk. In addition to the effects on financial stability, theoretical models suggest various channels through which macroprudential policy could have broader macroeconomic effects on economic activity, consumption and investment. But empirical evidence on such macroeconomic effects remains sparse, in particular in a framework that would incorporate both monetary and macroprudential policy.

Contribution

We provide empirical evidence about the broader macroeconomic effects of macroprudential policy and the underlying transmission mechanism, as well as about the response of macroprudential policy to credit shocks. We also compare these with monetary policy. As the empirical methodology, the paper uses structural panel vector autoregressions and a dataset covering 32 advanced and emerging economies.

Findings

We find that macroprudential policy shocks have effects on real GDP, the price level and credit that are very similar to those of monetary policy shocks, but the detailed transmission of the two policies is different. Whereas macroprudential policy shocks mostly affect residential investment and household credit, monetary policy shocks have more widespread effects on the economy. We also find that positive credit shocks are generally met with tighter macroprudential policy, and macroprudential and monetary policy respond to credit shocks in a complementary way.

Abstract

In this paper, we provide empirical evidence about the broader macroeconomic effects of macroprudential policies and the underlying transmission mechanism, as well as the response of macroprudential policy to financial risks. To this end, we use structural panel vector autoregressions and a dataset covering 32 advanced and emerging economies. We show that macroprudential policy shocks have effects on real GDP, the price level and credit that are very similar to those of monetary policy shocks, but the detailed transmission of the two policies is different. Whereas macroprudential policy shocks mostly affect residential investment and household credit, monetary policy shocks have more widespread effects on the economy. Moreover, while positive credit shocks are generally met with tighter macroprudential policy, macro-financial country characteristics such as the exchange rate regime and the level of financial development affect the policy response.

JEL codes: E58, E61, G28

Keywords: macroprudential policy, monetary policy, credit, macroeconomic effect, macroprudential policy response