Macroprudential Policy Research Articles

Bubble in the Real Estate Market and Its Risks to Macroeconomy: A Case Study of the United States

The real estate market in the United States is renowned for its cycles of rapid growth and subsequent decline, which have profound implications for the broader economy. This paper delves into the nature of real estate bubbles, investigating their formation, development, and the associated risks to the macroeconomy, with a particular focus on the U.S. market. Through a comprehensive analysis of historical data, key economic indicators, and case studies of significant real estate bubbles, including the infamous 2008 financial crisis, the paper elucidates how these bubbles emerge and the mechanisms through which they impact economic stability. Real estate bubbles are characterized by unsustainable increases in property prices driven by speculative investment, excessive credit expansion, and optimistic market sentiments. The study examines the underlying causes of these bubbles, such as lax lending practices and regulatory failures, and their subsequent bursting, which often leads to severe economic repercussions. The paper further explores how the collapse of a real estate bubble can trigger widespread financial instability, impacting the banking sector, leading to a credit crunch, and resulting in reduced consumer spending and economic growth. Additionally, the paper discusses the role of policy responses in mitigating the risks associated with real estate bubbles. Effective measures include monetary policy adjustments to control credit conditions, enhanced regulatory oversight to prevent lax lending practices, and macroprudential policies designed to address systemic risks. By providing a detailed analysis of these elements, the paper aims to offer insights into managing and preventing the adverse effects of real estate market fluctuations on the macroeconomy.

Financial cycle synchronization in the advanced and systemic middle-income economies: evidence from a dynamic factor model

Financial cycles are widely regarded as key drivers of global financial conditions and major contributors to international financial crises. Understanding the extent to which these cycles are interconnected is essential for developing early warning systems to predict financial crises and for informing the design of macroprudential and monetary policies. In this context, a dynamic factor model and time-varying Granger causality (TVGC) are employed to assess the degree of financial cycle synchronization between advanced economies and systemic middle-income countries (SMICs). Our data spans the period from 1980Q1 to 2023Q4. The analysis reveals that a common factor—shared by both advanced and systemic middle-income economies—plays a significant and persistent role in driving financial cycles across these regions. Notably, the influence of this common factor intensified following the 2007–2009 global financial crisis, highlighting the growing financial interconnectedness between these economies. These results strongly support the argument for closer coordination of macroprudential policies between advanced economies and SMICs. The findings from the TVGC analysis further reinforce the conclusions drawn from the dynamic factor model. Specifically, the TVGC results indicate a bidirectional causality between the financial cycles of advanced economies and SMICs, suggesting mutual influence. This bidirectional relationship underscores the importance of enhanced policy coordination across these economies to mitigate systemic risks.

Estabilidad financiera y volatilidad de los mercados criptoactivos

The global financial crisis made it clear that financial stability should be considered an objective of economic policy. In this context, traditional economic policies of demand management encounter serious limitations to correct the problems of financial instability, requiring the use of regulatory and macroprudential policies. Thus, we have since witnessed the emergence of a new objective (financial stability) and a new instrument (macroprudential policy) in economic policy. The development of cryptoassets and their ecosystem constitute a challenge for financial stability, as their excessive volatility introduces significant risks of destabilizing financial systems. To avoid this, it is not a matter of banning them or limiting their use, but of regulating and supervising them appropriately.

Effects of inflation and macroprudential policies on bank risk: Evidence from emerging economies

This study explores the relationship between macroprudential policies, inflation, and bank risk in emerging economies. Several significant findings emerge based on panel data from approximately 1400 commercial banks across 32 emerging economies over the period 2000–2018. Firstly, a positive correlation is observed between inflation rates and bank risk, suggesting that inflation increases financial instability. Contrary to their intended purpose, stringent macroprudential policies actually intensify bank risk during periods of high inflation rather than stabilizing economies. Secondly, the analysis indicates that macroprudential tools designed to moderate credit cycles significantly enhance the risk banks face from inflation. Varied impacts are observed among different macroprudential instruments: capital-related, reserve requirement, and foreign exchange-related tools counterproductively heighten bank risk during periods of high inflation. Conversely, asset-based and liquidity-focused tools effectively reduce bank risk under similar inflationary conditions.

How does macroprudential policy affect the relationship between financial openness and bank risk-taking

This paper investigates how macroprudential policy affects the relationship between financial openness and bank risk-taking by utilizing Chinese commercial banking data from 2005 to 2021. We find that financial openness generally promotes bank risk-taking. Robustness checks consistently support this finding, including variable substitutions, sample period adjustments, controlling for other shocks, and endogeneity concerns. The impact of financial openness on risk-taking demonstrates potential heterogeneity, contingent upon factors such as bank financing constraints, risk management, and financial regulation. We delineate credit, interest rate, and asset price channels through which financial openness affects bank risk-taking, notably by amplifying bank credit volumes, diminishing credit asset ratios, compressing net interest margins and spreads, and elevating asset prices. Macroprudential policies are identified as effective countermeasures against the heightened bank risk-taking associated with financial openness, with the effectiveness of these policies varying by the specific regulatory instruments.

Can macroprudential policy rail for green innovation? Evidence from Chinese energy enterprises

Can macroprudential policy rail for green innovation? Evidence from Chinese energy enterprises

Fiscal and macroprudential policies in a monetary union

AbstractIn the European Monetary Union (EMU), monetary policy is determined by the European Central Bank (ECB). This arrangement can give rise to certain national economic imbalances that may potentially be addressed through national policies. Traditionally, fiscal policy has been the primary tool to correct these imbalances. However, following the global financial crisis (GFC), a new policy tool has emerged: national macroprudential policies, which aim to mitigate financial risks. This situation raises an intriguing research question: How do macroprudential and fiscal policies interact? Through their influence on real interest rates and economic activity, discretionary macroprudential policies can impact the trajectory of public debt and may necessitate fiscal adjustments, such as tax rate increases, to stabilize the public debt-to-GDP ratio. In a monetary union, a domestic macroprudential shock generates significant cross-border financial effects and also influences the fiscal stance of foreign countries. Furthermore, discretionary government spending policies have an impact on housing prices and households debt. Therefore, the responsiveness of macroprudential policy to changes in housing prices affects the fiscal multiplier.

Robust-less-fragile: Tackling systemic risk and financial contagion in a macro agent-based model

We extend the Schumpeter meeting Keynes (K+S) agent-based model by introducing an evolving interbank network in the money market. Banks are exposed to counterparty risk and evaluate interbank positions using a network valuation (NEVA) clearing mechanism, which ensures systemic risk minimization with minimal assumptions on banks’ behavior. The model can replicate several stylized facts about the topology of the interbank network and the dynamics of banks’ balance sheets. The model encompasses financial contagion and systemic risk, allowing us to study the interactions between micro- and macro-prudential policies. Our results suggest that the introduction of a micro-prudential regulation also accounting for the network structure can reduce the incidence of systemic risk events. We also find that, in presence of a two-pillar regulatory framework – grounded on a Basel III macro-prudential regulation and a NEVA-based micro-prudential one –, there is no trade-off between financial stability and macroeconomic performance. This points towards the possibility of designing a regulatory framework able to achieve financial stability without overly stringent capital requirements.

Cheap U.S. Dollar Credit: Panacea or Poison? Firm‐Level Evidence from Emerging Markets

AbstractUsing firm‐level data from emerging markets, we find that the dollar debt issuance significantly increases issuers’ risk‐taking. While the dollar debt issuance significantly increases issuers’ investment spending, it reduces their investment efficiency substantially. We also show that macroprudential policies can help mitigate the risk‐taking effect of dollar debt issuance. In addition, we provide evidence that nonissuers exhibit increased risk‐taking when faced with rising intraindustry competition pressure from issuers. Overall, the cross‐sectional risk distributions at the industry level are more tilted toward the downside.

The national life of transnational models: macroprudential policy and the politics of translation in Germany and the UK

Most scholarship to date has treated macroprudential policy as a relatively coherent approach developed through transnational processes of knowledge construction. Using Germany and the UK as a case study, this article shows that there was indeed a remarkable level of convergence on an internationally validated set of key ideas, models, scripts, and policy tools even in countries with otherwise widely diverging traditions of financial governance. Surprisingly, however, similarities in discourse are often still accompanied by very different uses of individual policy tools. This article argues that to make sense of these persistent differences, we have to pay attention to the ways in which central bankers tend to subject imported ideas and scripts to a process of translation before using them in the actual policy process. Of particular importance in this regard are attempts at endogenization and contextualization of models and indicators imported from the transnational realm. In drawing attention to these processes of policy translation, the article also reaffirms the inherently political nature of the operationalization of transnationally validated ideas. It will be argued that the processes of translation thus uncovered are likely to be relevant to a much broader array of policy domains and countries.

The effects of macroprudential policies on house prices: Evidence from non-ordinary house purchasing policy using China real transaction data

This paper contributes to the international policy debate on the effect of macroprudential policy on housing prices. Our identification relies on the fact that ordinary housing and non-ordinary housing in Beijing face different loan-to-value (LTV) restrictions and transaction tax rates. This paper uses regression discontinuity (RD) design to test whether the differentiated regulation of ordinary housing and non-ordinary housing caused a discontinuous change in housing prices with house-level transaction data. We find that housing prices have a significant discontinuous decline at the cutoff point caused by macroprudential policy, which we take 140 square meters since it is the identification standard of non-ordinary housing. Further, we carry out RD-DID analysis to investigate the influence of loan-to-value (LTV) restrictions on housing prices. We find that around 2% decline in house prices is caused by credit policy.

Sustainability, energy finance and the role of central banks: A review of current insights and future research directions

The importance of energy finance in sustainable development and, in particular, within the sustainable finance strand has visibly increased in recent years. In this review article, we focus on the role of central banks in this area. We draw on official documents from regulatory and supervisory institutions, central banks, think-tanks, non-governmental organisations and academic publications. First, we discuss the definitions of energy finance, Environmental, Social and Governance (ESG) risks and their transmission channels. Then we describe the mandates of central banks to act in this field. Finally, we discuss key aspects of ESG monetary and macroprudential policies as well as central banks' communication in this regard. We conclude by proposing topics for further research in this area.

Asset bubbles and financial frictions in small open economies☆

Financial cycles involving asset bubbles frequently coincide with the cyclical expansion and contraction of credit conditions. The collapse of asset and credit bubbles frequently precedes financial crises and economic recessions. We develop a small open economy DSGE model that incorporates asset bubbles and banking frictions. Credit-constrained firms trade in intrinsically useless bubble assets. Financial intermediaries, constrained by their balance sheets, introduce banking friction into financial markets. The static analysis suggests that increases in foreign interest rates unfavorably impact the formation of domestic bubbles. Dynamic analysis indicates that asset bubbles amplify macroeconomic fluctuations, with banking leverage constraints intensifying this effect. Therefore, asset bubbles amplify and propagate economic fluctuations. Unconventional monetary policy, macroprudential policy, and bubbly bailout policy could mitigate the amplification effects of banking leverage constraints and asset bubble bursts on macroeconomic fluctuations, which are mediated through reducing risk premiums, curbing capital outflows, and sustaining asset bubble channels, respectively. Finally, combining unconventional monetary policies with bubbly bailout policies and macroprudential policies yields superior outcomes.

Monetary and macroprudential policies: How to Be green? A political-economy approach

This study examines the trade-offs that central banks would face if they began addressing climate change. The various instruments available to address climate-related risks overlap with those currently used for monetary and macroprudential purposes. However, most existing literature fails to adequately consider the political-economy aspect of this phenomenon. This creates a bias in favor of interventions by central banks. Using a political principal–agent setting that eliminates this bias, we examine the conditions under which the central bank architecture could effectively pursue this goal without compromising its core mandates. The effectiveness of central banks depends on their ability to calibrate, maintain independence and demonstrate a degree of activism.

Loan loss provisions of European banks – Does macroprudential tightening matter?

In this paper, we study the relation between macroprudential policy and loan loss provisioning policy of European banks between 1996 and 2019. We analyse both the level of loan loss provisions (LLP) and their use in income smoothing by banks. Overall, we demonstrate that macroprudential tightening actions are associated with changes in LLP policy. Banks decrease their LLP when macroprudential policies are tightened and this result is particularly strong under Basel III. In parallel, we find that macroprudential tightening exacerbates income smoothing in the pre-Basel III period and diminishes it under Basel III. Links between LLP policy and macroprudential policy strongly depend on the category of tools that are being tightened. In particular, instruments relating to provisioning standards are associated with increased LLP, while lower LLP are observed when a tightening occurs in tools connected with taxes on financial institutions and activities.

The rise of the walking dead: Zombie firms around the world

We build a comprehensive new dataset spanning listed and private nonfinancial zombie firms across Advanced Economies and Emerging Markets over the past two decades. Our findings reveal a global rise in the prevalence of these unproductive and unviable firms, particularly since the Global Financial Crisis and the Covid-19 pandemic. We show that private firms exhibit lower zombification rates due to their lower average survival rates. Our paper also offers a new perspective on zombie lending drivers: lenders may rationalize zombie lending based on overly optimistic expectations of a recovery in zombies’ future earnings. We then document that macroprudential policies targeting bank capital and loan restrictions can effectively mitigate the adverse effects of zombification. However, strengthening the banking sector alone may not suffice without robust insolvency frameworks prepared to manage firm restructuring and insolvency.

Do commodity prices matter for global systemic risk? Evidence from ML variable selection

We identify robust predictors of global systemic risk proxied by conditional capital shortfall (SRISK) among a comprehensive set of commodity prices for the period between January 2004 and December 2021. The search is based on a battery of ML variable selection algorithms which apply both to price levels and price shocks in the presence of control variables, including the first lag of SRISK, world industrial production, global economic policy uncertainty, geopolitical risk as well as the global stance of monetary and macroprudential policies. We find that these controls outweigh commodity prices as the predictors of global systemic risk. Of the commodities themselves, the prices for agricultural commodities, including food, e.g. chicken, bananas, beef, tea, cocoa, are more important predictors of global systemic risk than the prices for energy commodities, e.g. natural gas and oil prices. The financialization of agricultural commodities, bio-energy expansion as well as commodity-specific dependence of the major economies contributing to global systemic risk, e.g. China, account for our main finding. We also document the positive linkage between commodity prices and systemic risk for the majority of commodities. Thus, monitoring commodity prices to avoid their unbalanced growth is of vast importance to curb global systemic financial risk.

Macroprudential policy and systemic risk in G20 nations

Using a panel of 496 banks from the G20 nations, the study assesses the role of macroprudential policies in reducing systemic risk. The study further assesses the utility of these policies in conjunction with monetary policy instruments and bank and country-specific characteristics and finds the significant impact of macroprudential policies in curbing systemic risk and promoting economic stability. The study finds this relationship to hold regardless of economic conditions like inflationary pressure and financial distress. The result highlights that easing macroprudential policies during financial distress can help banks cope with systemic losses. We split the macroprudential policies into policies targeting the demand and supply of loans and find complementarity among the policies to reduce systemic risk. Our results demonstrate the heterogenous effect of macroprudential policies in limiting systemic risk, with the effect varying with bank size, leverage, liquidity, and concentration of loans. Finally, we find a moderating role of these policies in limiting the impact of uncertainties on systemic risk.

A Structural Vector Autoregression Exploration of South Africa’s Monetary and Macroprudential Policy Interactions

Interactions between monetary and macroprudential policy are crucial in safeguarding price and financial stability. This study investigates the macroeconomic and financial impacts of monetary and macroprudential policy interactions in South Africa, a leading African economy in developing macroprudential frameworks. The existing literature largely focuses on the effectiveness of these policies independently, leaving a gap in understanding how their interaction affects their overall efficacy. Employing a Structural Vector Autoregression (SVAR) model and utilizing data from 1980 to 2023, this study uniquely incorporates the financial cycle to represent financial developments. The results reveal significant effects of both policies on key variables such as output, the financial cycle, and the price level. Specifically, policy contractions reduce output and the financial cycle but increase the price level, illustrating the ‘price puzzle’. This study further identifies an endogenous response between the two policies: monetary policy reacts by rising to reduce price levels following a macroprudential shock, while macroprudential policy rises to stimulate financial activity after a monetary shock. These findings underscore the importance of using both policies in conjunction but in opposite directions to balance their effects and achieve price and financial stability. This study suggests that an optimal combination of monetary and macroprudential policies is critical for maintaining macroeconomic equilibrium.

Carbon taxes and tariffs, financial frictions, and international spillovers

Ambitious climate policy, coupled with financial frictions, has the potential to create macrofinancial stability risk. Such stability risk may expand beyond the economy implementing climate policy, potentially catching other countries off guard. International spillovers may occur because of trade and financial channels. Hence, we study the design and effects of climate policies in the world economy with international trade and financial flows. We develop a two-sector, two-country, dynamic general equilibrium model with financial frictions, climate policies, including carbon tariffs, and macroprudential policies. Using the calibrated model, we evaluate spillovers from unilateral domestic carbon pricing to foreign economies and back. We also examine more ambitious climate architectures involving carbon tariffs or a global carbon price. We find that accounting for cross-border financial flows and frictions in credit markets is crucial to understand the effects of climate policies and to guide the implementation of macroprudential policies at the global scale aimed at minimizing transition risk and paving the way for ambitious climate policy.