Macroprudential Policy Research Articles

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 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.

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.

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.

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.

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.

Shadow banking, macroprudential regulation and redistributional effects*

ABSTRACT This paper studies the implications of increasing the size of the shadow banking sector for economic activity, financial stability, and welfare. I consider a DSGE model in which lending can come from two different sources; a formal bank or private lending. Banking regulation, in the form of capital requirements, only applies to the formal banking sector. Private lenders represent the shadow banking system. Results show that an increase in shadow banking leads to a higher amount of credit in the economy, which in turn implies higher consumption by borrowers. However, after a certain threshold, a large proportion of shadow banking is welfare decreasing. Moreover, the presence of an unregulated banking sector can lead to unintended effects of macroprudential policy. That is, stricter regulation in the traditional banking sector by the authorities may result in an increase in credit flows to those banks with lower regulatory levels, especially when this regulation comes from borrower-based instruments. Thus, macroprudential authorities should take into account these redistributional effects of shadow banking when considering their regulatory perimeter.

From Brown to Green: Climate Transition and Macroprudential Policy Coordination

From Brown to Green: Climate Transition and Macroprudential Policy Coordination

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.

Capital Controls or Macroprudential Policies: Which is Better for Land Booms and Busts?

AbstractEmerging markets have experienced land booms and busts along with international capital inflows and outflows repeatedly. This study quantitatively examines the effectiveness of (i) macroprudential policies targeting land markets and (ii) capital controls targeting capital inflows and outflows. We analyze which policy better manages the coincidence between land booms (busts) and capital inflows (outflows). We build a small open economy NK-DSGE model in which banks choose their asset portfolio between physical capital and land subject to financial constraints. The quantitative results show that the superiority of the two policies depends on the type of shock impacting a small open economy. In the case of domestic land market shocks, macroprudential policies enhance welfare, whereas capital controls reduce welfare. Conversely, in the case of foreign interest rate shocks, the superiority of the two policies is reversed: capital controls enhance welfare, while macroprudential policies deteriorate welfare.

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.

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.

Not all banking crises are alike: Assessing their distributional impacts relative to pre-crisis credit gaps

The empirical literature on the effects of banking crises on income inequality has yielded mixed findings. In this paper, we aim to reconcile these mixed results by evaluating the effects of banking crises on income inequality in relation to pre-crisis credit gaps. We apply the Local Projections methodology to a yearly panel of 68 banking crises that occurred in 59 countries over the period 1970–2017. Three key results emerge. First, banking crises lead to increased income inequality. Second, only those banking crises preceded by larger credit gaps show a significant increase in income inequality. Third, a deeper contraction in the credit supply and a higher unemployment rate are two channels that could potentially explain why inequality rises more after banking crises with larger pre-crisis credit gaps. These results underscore the importance of macroprudential policies that, as well as limiting the amplitude of the financial cycle and the associated risks of financial crises, could also play a key role in reducing the distributional consequences of banking crises.

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.

The Effect of Macroprudential Policy on Income Inequality

The Effect of Macroprudential Policy on Income Inequality

Monetary-Macroprudential Policy Synergy Through the Bank Lending Channel in Indonesia

ABSTRACT This study examines the efficiency of monetary policy transmission via bank lending channels in Indonesia, specifically emphasizing its interaction with macroprudential policy. We utilize panel data encompassing individual-level information from banks in Indonesia from 2005 to 2019. The results of our analysis provide empirical support for the bank lending channel efficiency in the context of the monetary and macroprudential policy framework. The findings underscore the importance of macroprudential interactions in moderating the effect of monetary policy. Furthermore, our research uncovers asymmetrical consequences stemming from the implementation of monetary contraction/expansion policies, as well as the effects resulting from variances in the characteristics of banks. Our study enhances the understanding of the intricate relationship between monetary policy, macroprudential measures, and the bank lending channel in Indonesia.

Capital flow freezes

AbstractThe period following the 2008 financial crisis focused attention on “twin-crises,” where banking crises precipitate sovereign crises due to increased bank support. We show that when private sector debt is renegotiated centrally, and bargaining power is low, it results in suboptimally low levels of debt and default rates (haircuts). If, instead, the bargaining power is sufficiently high, the supply of debt exceeds its demand and capital inflows “freeze”. These inefficiencies arise because the decentralized borrowers fail to consider how their bond supply impacts debt renegotiation outcomes, affecting both bond prices and the asset span. These issues can be addressed through macroprudential policies in the form of taxing capital inflows.

The Impact of Restrictive Macroprudential Policies through Borrower-Targeted Instruments on Income Inequality: Evidence from a Bayesian Approach

This study used the panel data from 15 emerging markets to examine the impact of restrictive macroprudential policies on income inequality from 2000–2019 using Bayesian panel vector autoregression and Bayesian panel dynamics generalised method of moments models. The chosen models are suitable for addressing multiple entity dynamics, accommodating a wide range of variables, handling dense parameterisation, and optimising formativeness and heterogeneous individual-specific factors. The empirical analysis utilised various macroprudential policy proxies and income inequality measures. The results show that when the central banks tighten systems using macroprudential policy instruments to sticker debt-to-income and financial instruments for lower-income borrowers (the bottom 40% of the income distribution), they promote income inequality in these countries while reducing income inequality for high-income borrowers (the high 1 percent of the income distribution). The impact of loan-to-value ratios was found to be insignificant in these countries. Fiscal policy through government expenditure and economic development reduces income inequality, while money supply and oil-price shocks exacerbate it. The study suggests implementing a progressive debt-to-income (DTI) ratio system in emerging markets to address income inequality among lower-income borrowers. This would adjust DTI thresholds based on income brackets, allowing lenient credit access for lower-income borrowers while maintaining stricter limits for higher-income borrowers. This would improve financial stability and reduce income disparities. Additionally, targeted financial literacy programs and a petroleum-linked basic income program could be implemented to distribute oil revenue to lower-income households. A monetary supply stabilisation fund could also be established to maintain financial stability and prevent excessive inflation.

EFFICIENCY OF MONETARY POLICY IMPLEMENTATION AS A BASIS FOR CENTRAL BANK STABILISATION POLICY UNDER MARTIAL LAW (UKRAINIAN AND ISRAELI PRACTICES)

The purpose of the paper is to summarise and present the anti-crisis practices of a central bank during martial law in the country, based on the experience of the National Bank of Ukraine and the Bank of Israel. The research methodology is based on an analysis of reports, guidelines, statistical data, scientific articles, legislation bases, and other relevant materials. One of the methodological aspects of this study is a comparison of the knowledge acquired about the regulations implemented by the two central banks after the introduction of martial law in the countries. The objective is to identify potential lessons learned for the banking regulations of Ukraine and the State of Israel. The results of the study show that the practical implementation of stabilisation measures by central banks is crucial for achieving financial stability of the state both during and after wartime, as well as the ability to predict possible deepening of crises and minimise their consequences. The tools and methods used by these central banks differ. In particular, the NBU's main monetary policy instrument was foreign exchange interventions, while the BoI actively used the key policy rate. The proper formation of international currency reserves and the possibility of using them during a war-related crisis is critical for both countries. This fact confirms that crisis management has different types of scenarios. Each anti-crisis scenario is unique. This paper highlights the practical need for interaction between monetary and macroprudential policies of the central bank in wartime. It demonstrates various combinations of methods and instruments of the central bank's monetary policy. This study also shows the interdependence of the economies of these two countries. Practical implementation. This analysis provides insight into the anti-crisis activities of central banks during unpredictable periods in a country's life, namely, during martial law. At the present stage, banking systems do not often face the challenges of war. Therefore, studying each case is important for improving theoretical knowledge and deepening practical research. Value / Originality. The author of the study collected the experience and practices of stabilisation activities of the central banks of Ukraine and Israel during the war.

Pandemic shocks and macroprudential policy

Abstract We introduce an extended borrower–saver DSGE (Dynamic Stochastic General Equilibrium) model, where classifications of occupations are split further into two subcategories, according to whether their occupation is directly “affected” by a pandemic shock. We find that, contrary to the standard literature, during a pandemic shock an increase in the Loan-to-Value (LTV) ratio can increase social welfare and make all four agent types (borrowers affected, borrowers non-affected, savers affected, and savers non-affected) better off. Countercyclical optimal LTV rules are shown to increase social welfare, with savers gaining at the expense of borrowers, including those mostly affected by the pandemic. An interest rate mortgage subsidy to those worst affected (“affected” mortgage borrowers), in coordination with stricter monetary and LTV policy, are shown to increase both social welfare and the welfare of borrowers and savers affected by the pandemic.