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Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences

TL;DR: In this article, the effectiveness of macro-prudential instruments in reducing systemic risk over time and across institutions and markets was evaluated using data from 49 countries, and the analysis suggests that many of the most frequently used instruments are effective in reducing procyclicality and the effectiveness is sensitive to the type of shock facing the financial sector.
Abstract: This paper provides the most comprehensive empirical study of the effectiveness of macroprudential instruments to date. Using data from 49 countries, the paper evaluates the effectiveness of macroprudential instruments in reducing systemic risk over time and across institutions and markets. The analysis suggests that many of the most frequently used instruments are effective in reducing pro-cyclicality and the effectiveness is sensitive to the type of shock facing the financial sector. Based on these findings, the paper identifies conditions under which macroprudential policy is most likely to be effective, as well as conditions under which it may have little impact.

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Journal ArticleDOI
TL;DR: In this paper, the interaction between capital requirements and monetary policy is assessed by means of simple rules in a dynamic general equilibrium model featuring a banking sector, and the benefits of introducing capital requirements become sizeable when financial shocks, which affect the supply of loans, are important drivers of economic dynamics; the availability of capital requirements as a policy tool yields a significant gain in terms of macroeconomic stabilization.
Abstract: The interaction between capital requirements and monetary policy is assessed by means of simple rules in a dynamic general equilibrium model featuring a banking sector. In “normal” times, when economic dynamics are driven by supply shocks, an active use of capital requirements generates modest benefits in terms of volatility of the target variables compared to the case in which only the central bank carries out stabilization policies. The lack of cooperation between the two policymakers may result in excessive volatility of the monetary policy rate and capital requirements. The benefits of introducing capital requirements become sizeable when financial shocks, which affect the supply of loans, are important drivers of economic dynamics; the availability of capital requirements as a policy tool yields a significant gain in terms of macroeconomic stabilization, regardless of the type of interaction between monetary and capital requirements policies.

410 citations

Journal ArticleDOI
TL;DR: In this article, the authors analyze how changes in balance sheets of some 2800 banks in 48 countries over 2000-2010 respond to specific macro-prudential policies, and find that measures aimed at borrowers such as caps on debt to income and loan-to-value ratios, and limits on credit growth and foreign currency lending are effective in reducing leverage, asset and noncore to core liabilities growth during boom times.

404 citations


Cites background from "Macroprudential Policy: What Instru..."

  • ...Lim et al. (2011) explore the role of macro-prudential policies and document evidence of some policies being effective in reducing the procyclicality of credit and leverage....

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  • ...For example, Lim et al. (2011) explore the role of MaPP on affecting credit and leverage growth, while Crowe et al. (2011) explore the effects of MaPP like LTVs on real estate booms and busts....

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  • ...Data on actual use of MaPP in recent years have been collected through a survey of country authorities for a sample of some 48 countries, both ACs and EMs (see further Lim et al, 2011 for the exact coverage and definitions) as well as from an internal IMF survey of country desk economists....

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Posted Content
TL;DR: In this article, the authors argue that the answer will depend on three questions: (i) how effective is macro-prudential policy in maintaining financial stability, (ii) what is the effect of monetary policy on risk taking and financial stability; and (iii) the risk of financial dominance, i.e., the risk that financial stability considerations undermine the credibility of the central bank's price stability mandate.
Abstract: The recent financial crisis has again raised the question to what extent price-stability-oriented monetary policy frameworks should take into account financial stability objectives. In this paper I argue that the answer will depend on three questions: (i) how effective is macroprudential policy in maintaining financial stability? (ii) what is the effect of monetary policy on risk taking and financial stability? and (iii) what is the risk of financial dominance, i.e., the risk that financial stability considerations undermine the credibility of the central bank’s price stability mandate? I review the theory and evidence and conclude that while the new macroprudential policy framework should be the main tool for maintaining financial stability, monetary policy authorities should also keep an eye on financial stability. This will allow the central bank to lean against the wind if necessary, while maintaining its primary focus on price stability over the medium term.

341 citations

Journal ArticleDOI
TL;DR: In this article, the authors discuss the potential role of monetary policies and macro-prudential financial regulation, modifying the incentives and constraints that banks face when deciding their lending strategy may fruitfully expand credit creation directed towards low-carbon sectors.

338 citations

Journal ArticleDOI
TL;DR: In this article, the authors construct an index of macro-prudential policies in 57 advanced and emerging economies covering the period from 2000:Q1 to 2013:Q4, with tightenings and easings recorded separately.

274 citations


Cites background from "Macroprudential Policy: What Instru..."

  • ...Most empirical work on the subject relies on the 2011 IMF survey data presented in Lim et al. (2011). Using this database, Lim et al....

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  • ...Most empirical work on the subject relies on the 2011 IMF survey data presented in Lim et al. (2011). Using this database, Lim et al. (2011) find that several different macroprudential tools reduce the procyclicality of credit growth by reducing the correlation between credit growth and GDP growth....

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  • ...Using this database, Lim et al. (2011) find that several different macroprudential tools reduce the procyclicality of credit growth by reducing the correlation between 3 In the counterfactual exercise we restrict our attention to the last three years of the sample period when macroprudential…...

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  • ...Most empirical work on the subject relies on the 2011 IMF survey data presented in Lim et al. (2011) ....

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  • ...Most empirical work on the subject relies on the 2011 IMF survey data presented in Lim et al. (2011). Using this database, Lim et al. (2011) find that several different macroprudential tools reduce the procyclicality of credit growth by reducing the correlation between credit growth and GDP growth. IMF (2012) explores the relationship between monetary and...

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References
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Journal ArticleDOI
TL;DR: In this paper, a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables is presented. But the authors do not consider models with predetermined variables that have constant correlation with the effects.

16,245 citations


Additional excerpts

  • ...26Developed by Arellano and Bover (1995)....

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Journal ArticleDOI
TL;DR: In this article, the authors argue that rational bank managers with short horizons will set credit policies that influence and are influenced by other banks and demand side conditions, leading to a theory of low frequency business cycles driven by bank credit policies.
Abstract: In a rational profit-maximizing world, banks should msdntain a credit policy of lending if and only if borrowers have positive net present value projects. Why then are changes in credit policy seemingly correlated with changes in the condition of those demanding credit? This paper argues that rational bank managers with short horizons will set credit policies that influence and are influenced by other banks and demand side conditions. This leads to a theory of low frequency business cycles driven by bank credit policies. Evidence from the banking crisis in New England in the early 1990s is consistent with the assumptions and predictions of the theory.

822 citations

Journal ArticleDOI
TL;DR: The recent financial crisis has highlighted the need to go beyond a purely micro approach to financial regulation and supervision and the number of policy speeches, research papers and conferences that discuss a macro perspective on financial regulation has grown considerably.
Abstract: The recent financial crisis has highlighted the need to go beyond a purely micro approach to financial regulation and supervision. As a consequence, the number of policy speeches, research papers and conferences that discuss a macro perspective on financial regulation has grown considerably. The policy debate is focusing in particular on macroprudential tools and their usage, their relationship with monetary policy, their implementation and their effectiveness. Macroprudential policy has recently also attracted considerable attention among researchers. This paper provides an overview of research on this topic. We also identify important future research questions that emerge from both the literature and the current policy debate.

732 citations


"Macroprudential Policy: What Instru..." refers background in this paper

  • ...2See, for example, Borio (2010), Galati and Moessner (2011), and Viñals (2010 and 2011)....

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Journal ArticleDOI
TL;DR: In this article, the authors examine how the informational structure of loan markets interacts with banks' strategic behavior in determining lending standards, lending volumes, and the aggregate allocation of credit in a setting where banks obtain private information about their clients' creditworthiness, and show that banks may loosen lending standards when information asymmetries vis a vis other banks are low.
Abstract: This paper examines how the informational structure of loan markets interacts with banks’ strategic behavior in determining lending standards, lending volumes, and the aggregate allocation of credit. In a setting where banks obtain private information about their clients’ creditworthiness, we show that banks may loosen lending standards when information asymmetries vis a vis other banks are low, such as when the proportion of borrowers with unknown projects in the market increases. In equilibrium this leads to a deterioration of banks’ portfolios, a reduction in their profits, and an aggregate credit expansion. Furthermore, we show that although these low standards may maximize aggregate surplus, they increase the risk of financial instability. We therefore provide an explanation for the sequence of financial liberalization, lending booms, and banking crises that have occurred in many emerging markets. Finally, we examine the effects of information sharing and bank market structure in this context. JEL: D82, G21

540 citations

Journal ArticleDOI
TL;DR: The institutional memory hypothesis as mentioned in this paper suggests that deterioration in the ability of loan officers over the bank's lending cycle that results in an easing of credit standards may explain the procyclicality of bank lending.

522 citations