The benefits are at the tail: Uncovering the impact of macroprudential policy on growth-at-risk

Abstract

I uncover heterogeneous effects of macroprudential policy on GDP growth distribution by bringing together the literature on the impact of macroprudential policy and recent developments on the use of quantile regressions. I identify important benefits of macroprudential policy on the left-tail of the GDP growth distribution which contrast with the negative effects found in previous studies using conditional mean models. These benefits may offset the deterioration on growth-at-risk produced by the build-up of cyclical vulnerabilities and the materialization of financial crises. I also find that the impact of macroprudential policy is dependent on the position in the financial cycle, the type of instrument, and the time elapsed since its implementation. In particular, tightening capital measures during expansions may take up to two years to show evidence of benefits on growth-at-risk, while the positive impact of borrower-based measures is rapidly observed. Conversely, in downturns the benefits of loosening capital measures are more immediate, while those of borrower-based measures are limited. This suggests the importance of timing in macroprudential policy. Overall, this study provides a useful framework to assess the impact of macroprudential policy in terms of GDP growth and to identify the term-structure of specific instruments.