A Global Perspective on Macroprudential Policy Interaction With Systemic Risk, Real Economic Activity and Monetary Intervention

Mikhail Stolbov,Maria Shchepeleva,Alexander Karminsky

doi:10.2139/ssrn.3738951

Abstract

The paper empirically assesses how macroprudential policy interacts with systemic risk, industrial production and monetary intervention on the worldwide level during January 2006-December 2016. We adopt the aggregate proxies of these variables, capturing their global effects, and use a novel econometric technique, smooth local projections, by Barnichon and Brownlees (2019). Our major finding is that global macroprudential policy leads the monetary one, exhibiting a countercyclical pattern with respect to industrial production. The latter has an inverse bi-directional linkage with systemic risk. Thus, ex ante tight macroprudential policy can mitigate global systemic risk in a roundabout way – through its pro-growth effect on industrial production, even though there is no convincing evidence for the direct impact of macroprudential intervention on systemic risk. Our results withstand a number of extensions and a robustness check, involving an alternative measure of systemic stress in the world economy, thereby legitimizing the increased importance attached to macroprudential policy since the 2007-2009 global financial crisis.

Highlights

Since the 2007–2009 global financial crisis (GFC), macroprudential policy has been recognized as a tool to mitigate the buildup of systemic risk and severity of financial crises
Such relative superiority of macroprudential policy can arise from the low-interest-rate environment, which entrenched after the GFC and substantially narrowed the scope of monetary policy
Results of the extensions Decomposing SRISK into low and high regimes does not alter the major baseline conclusion regarding the pivotal role of global macroprudential policy for the monetary policy

Summary

Introduction

Since the 2007–2009 global financial crisis (GFC), macroprudential policy has been recognized as a tool to mitigate the buildup of systemic risk and severity of financial crises. This study examines how macroprudential and monetary policies interact with systemic risk, industrial production, and with each other on the global level from January 2006 to December 2018. When applying this econometric technique, we depart from the premise that along with SRISK and industrial production index, the proxies of global macroprudential and monetary policies are endogenous variables.

Results

Conclusion