Are Macroprudential Policies Effective Tools to Reduce Credit Growth in Emerging Markets?
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May 25, 2020
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Abstract
Macroprudential policies (MPPs) were relatively less used around the world before the 2008 global financial crisis (GFC). In the aftermath of the GFC, they have become popular both in advanced and emerging market countries. Through time, the accumulation of new data across countries has led to a growing body of literature investigating the effectiveness of such policies. In this paper, using a data set of 30 developing and emerging market countries and panel VAR approach with GMM estimation, we contribute to this literature, first, by testing whether MPPs are effective in controlling domestic credit growth after a global liquidity shock. Second, we test whether MPPs are more effective when a combination of MPPs are used to control credit growth. Results indicate that MPPs are effective tools to limit domestic credit growth, especially during the expansion phase of the credit cycle. Second, the number of MPP tools does matter to manage the magnitude and duration of the domestic credit growth effectively. We argue that the insufficient number of MPP implementations are unable to prevent leakages in the system and reduce the effectiveness of MPPs under a global liquidity shock.
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Erdem Küçükbıçakcı, F., Özen, E. and Ünalmış, İbrahim (2020) “Are Macroprudential Policies Effective Tools to Reduce Credit Growth in Emerging Markets?”, World Journal of Applied Economics, 6(1), pp. 73-89. doi: 10.22440/wjae.6.1.5.
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References
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Başkaya, Y. S., Binici, M., & Kenç, T. (2017). International Banking and Cross-Border Effects of Regulation: Lessons from Turkey. International Journal of Central Banking, 13, 379-403.
Bianchi, J., & Mendoza, E. G. (2010). Overborrowing, Financial Crises and 'Macro-Prudential' Taxes. Working Paper, National Bureau of Economic Research (NBER). doi:10.3386/w16091
Brunnermeier, M., & Sannikov, Y. (2014). A Macroeconomic Model with a Financial Sector. American Economic Review, 104, 379-421. doi:10.1257/aer.104.2.379
Bruno, V., & Shin, H. S. (2015). Cross-Border Banking and Global Liquidity. The Review of Economic Studies, 82, 535-64. doi:10.1093/restud/rdu042
Bruno, V., Shim, I., & Shin, H. S. (2017). Comparative Assessment of Macroprudential Policies. Journal of Financial Stability, 28, 183-202. doi:10.1016/j.jfs.2016.04.001
Bry, G., & Boschan, C. (1971). Cyclical Analysis of Time Series: Selected Procedures and Computer Programs. Cambridge University Press.
Cerutti, E., Claessens, S., & Laevenc, L. (2017). The Use and Effectiveness of Macroprudential Policies: New Evidence. Journal of Financial Stability, 28, 203-24. doi:10.1016/j.jfs.2015.10.004
Chari, V. V., & Kehoe, P. J. (2016). Bailouts, Time Inconsistency, and Optimal Regulation: A Macroeconomic View. American Economic Review, 106, 2458-93. doi:10.1257/aer.20150157
Cizel, J., Frost, J., Houben, A., & Wierts, P. (2019). Effective Macroprudential Policy: Cross-Sector Substitution from Price and Quantity Measures. Journal of Money, Credit and Banking, 51, 1209-35. doi:10.1111/jmcb.12630
Claessens, S., Ghosh, S. R., & Mihet, R. (2013). Macro-prudential Policies to Mitigate Financial System Vulnerabilities. Journal of International Money and Finance, 39, 153-85. doi:10.1016/j.jimonfin.2013.06.023
Clement, P. (2010). The Term ``Macroprudential'': Origins and Evolution. BIS Quarterly Review, 59-67.
Crowe, C., Dell'Aricci, G., Igan, D., & Rabanal, P. (2013). How to Deal with Real Estate Booms: Lessons from Country Experiences. Journal of Financial Stability, 9, 300-19. doi:10.1016/j.jfs.2013.05.003
D'Agostino, A., & Surico, P. (2009). Does Global Liquidity Help to Forecast U.S. Inflation? Journal of Money, Credit and Banking, 41, 479-89. doi:10.1111/j.1538-4616.2009.00216.x
De Nicolo, G., Favara, G., & Ratnovski, L. (2012). Externalities and Macroprudential Policy. Staff Discussion Notes, International Monetary Fund (IMF).
Domanski, D., Fender, I., & McGuire, P. (2011). Assessing Global Liquidity. BIS Quarterly Review, 57-71.
Epure, M., Mihai, I., Minoiu, C., & Peydró, J.-L. (2018). Household Credit, Global Financial Cycle, and Macroprudential Policies: Credit Register Evidence from an Emerging Country. Working Papers, International Monetary Fund (IMF).
Fendoğlu, S. (2017). Credit Cycles and Capital Flows: Effectiveness of the Macroprudential Policy Framework in Emerging Market Economies. Journal of Banking & Finance, 79, 110-128. doi:10.1016/j.jbankfin.2017.03.008
Galati, G., & Moessner, R. (2018). What Do We Know About the Effects of Macroprudential Policy? Economica, 85, 735-70. doi:10.1111/ecca.12229
Gertler, M., & Kiyotaki, N. (2015). Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy. American Economic Review, 105, 2011-43. doi:10.1257/aer.20130665
Gertler, M., Kiyotaki, N., & Queralto, A. (2012). Financial Crises, Bank Risk Exposure and Government Financial Policy. Journal of Monetary Economics, 59, S17--S34. doi:10.1016/j.jmoneco.2012.11.007
Global Financial System, C. (2011). Global liquidity – Concept, Measurement and Policy Implications. CGFS Papers, Bank of International Settlements (BIS).
Goodhart, C., & Hofmann, B. (2008). House Prices, Money, Credit, and the Macroeconomy. Oxford Review of Economic Policy, 24, 180-205. doi:10.1093/oxrep/grn009
Grossmann, A., Love, I., & Orlov, A. G. (2014). The Dynamics of Exchange Rate Volatility: A Panel VAR Approach. Journal of International Financial Markets, Institutions and Money, 33, 1-27. doi:10.1016/j.intfin.2014.07.008
Harding, D., & Pagan, A. (2002). Dissecting the Cycle: A Methodological Investigation. Journal of Monetary Economics, 49, 365-81. doi:10.1016/S0304-3932(01)00108-8
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for Unit Roots in Heterogeneous Panels. Journal of Econometrics, 115, 53-74. doi:10.1016/S0304-4076(03)00092-7
IMF. (2014). Staff Guidance Note on Macroprudential Policy - Detailed Guidance on Instruments. Policy Paper, International Monetary Fund (IMF).
Kahou, M. E., & Lehar, A. (2017). Macroprudential Policy: A Review. Journal of Financial Stability, 29, 92-105. doi:10.1016/j.jfs.2016.12.005
Kim, C. (2014). Macroprudential Policies in Korea – Key Measures and Experiences. Financial Stability Review, 121-130.
Kuttner, K. N., & Shim, I. (2016). Can Non-interest Rate Policies Stabilize Housing Markets? Evidence from a Panel of 57 Economies. Journal of Financial Stability, 26, 31-44. doi:10.1016/j.jfs.2016.07.014
Love, I., & Zicchino, L. (2006). Financial Development and Dynamic Investment Behavior: Evidence from Panel VAR. The Quarterly Review of Economics and Finance, 46, 190-210. doi:10.1016/j.qref.2005.11.007
Nickell, S. (1981). Biases in Dynamic Models with Fixed Effects. Econometrica, 49, 1417-26. doi:10.2307/1911408
Perotti, E., & Suarez, J. (2011). A Pigovian Approach to Liquidity Regulation. International Journal of Central Banking, 7, 3-41.
Pesaran, M. H. (2007). A Simple Panel Unit Root Test in the Presence of Cross-section Dependence. Journal of Applied Econometrics, 22, 265-312. doi:10.1002/jae.951
Reinhardt, D., & Sowerbutts, R. (2015). Regulatory Arbitrage in Action: Evidence from Banking Flows and Macroprudential Policy. Working papers, Bank of England. Retrieved from https://ideas.repec.org/p/boe/boeewp/0546.html
Rüffer, R., & Stracca, L. (2006). What is Global Excess Liquidity, and Does it Matter? Working Paper Series, European Central Bank.
Sousa, J., & Zaghini, A. (2004). Monetary Policy Shocks in the Euro Area and Global Liquidity Spillovers. Working Paper Series, European Central Bank.
Ünsal, D. F. (2013). Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses. International Journal of Central Banking, 9, 233-85.
Zhang, L., & Zoli, E. (2016). Leaning Against the Wind: Macroprudential Policy in Asia. Journal of Asian Economics, 42, 33-52. doi:10.1016/j.asieco.2015.11.001
Aiyar, S., Calomiris, C. W., & Wieladek, T. (2014). Does Macro-Prudential Regulation Leak? Evidence from a UK Policy Experiment. Journal of Money, Credit and Banking, 46, 181-214. doi:10.1111/jmcb.12086
Arellano, M., & Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. Review of Economic Studies, 58, 277-97. doi:10.2307/2297968
Avdjiev, S., Bruna, V., Koch, C., & Shin, H. S. (2018). The Dollar Exchange Rate as a Global Risk Factor: Evidence From Investment. Working Paper, Bank of International Settlements (BIS).
Başkaya, Y. S., Binici, M., & Kenç, T. (2017). International Banking and Cross-Border Effects of Regulation: Lessons from Turkey. International Journal of Central Banking, 13, 379-403.
Bianchi, J., & Mendoza, E. G. (2010). Overborrowing, Financial Crises and 'Macro-Prudential' Taxes. Working Paper, National Bureau of Economic Research (NBER). doi:10.3386/w16091
Brunnermeier, M., & Sannikov, Y. (2014). A Macroeconomic Model with a Financial Sector. American Economic Review, 104, 379-421. doi:10.1257/aer.104.2.379
Bruno, V., & Shin, H. S. (2015). Cross-Border Banking and Global Liquidity. The Review of Economic Studies, 82, 535-64. doi:10.1093/restud/rdu042
Bruno, V., Shim, I., & Shin, H. S. (2017). Comparative Assessment of Macroprudential Policies. Journal of Financial Stability, 28, 183-202. doi:10.1016/j.jfs.2016.04.001
Bry, G., & Boschan, C. (1971). Cyclical Analysis of Time Series: Selected Procedures and Computer Programs. Cambridge University Press.
Cerutti, E., Claessens, S., & Laevenc, L. (2017). The Use and Effectiveness of Macroprudential Policies: New Evidence. Journal of Financial Stability, 28, 203-24. doi:10.1016/j.jfs.2015.10.004
Chari, V. V., & Kehoe, P. J. (2016). Bailouts, Time Inconsistency, and Optimal Regulation: A Macroeconomic View. American Economic Review, 106, 2458-93. doi:10.1257/aer.20150157
Cizel, J., Frost, J., Houben, A., & Wierts, P. (2019). Effective Macroprudential Policy: Cross-Sector Substitution from Price and Quantity Measures. Journal of Money, Credit and Banking, 51, 1209-35. doi:10.1111/jmcb.12630
Claessens, S., Ghosh, S. R., & Mihet, R. (2013). Macro-prudential Policies to Mitigate Financial System Vulnerabilities. Journal of International Money and Finance, 39, 153-85. doi:10.1016/j.jimonfin.2013.06.023
Clement, P. (2010). The Term ``Macroprudential'': Origins and Evolution. BIS Quarterly Review, 59-67.
Crowe, C., Dell'Aricci, G., Igan, D., & Rabanal, P. (2013). How to Deal with Real Estate Booms: Lessons from Country Experiences. Journal of Financial Stability, 9, 300-19. doi:10.1016/j.jfs.2013.05.003
D'Agostino, A., & Surico, P. (2009). Does Global Liquidity Help to Forecast U.S. Inflation? Journal of Money, Credit and Banking, 41, 479-89. doi:10.1111/j.1538-4616.2009.00216.x
De Nicolo, G., Favara, G., & Ratnovski, L. (2012). Externalities and Macroprudential Policy. Staff Discussion Notes, International Monetary Fund (IMF).
Domanski, D., Fender, I., & McGuire, P. (2011). Assessing Global Liquidity. BIS Quarterly Review, 57-71.
Epure, M., Mihai, I., Minoiu, C., & Peydró, J.-L. (2018). Household Credit, Global Financial Cycle, and Macroprudential Policies: Credit Register Evidence from an Emerging Country. Working Papers, International Monetary Fund (IMF).
Fendoğlu, S. (2017). Credit Cycles and Capital Flows: Effectiveness of the Macroprudential Policy Framework in Emerging Market Economies. Journal of Banking & Finance, 79, 110-128. doi:10.1016/j.jbankfin.2017.03.008
Galati, G., & Moessner, R. (2018). What Do We Know About the Effects of Macroprudential Policy? Economica, 85, 735-70. doi:10.1111/ecca.12229
Gertler, M., & Kiyotaki, N. (2015). Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy. American Economic Review, 105, 2011-43. doi:10.1257/aer.20130665
Gertler, M., Kiyotaki, N., & Queralto, A. (2012). Financial Crises, Bank Risk Exposure and Government Financial Policy. Journal of Monetary Economics, 59, S17--S34. doi:10.1016/j.jmoneco.2012.11.007
Global Financial System, C. (2011). Global liquidity – Concept, Measurement and Policy Implications. CGFS Papers, Bank of International Settlements (BIS).
Goodhart, C., & Hofmann, B. (2008). House Prices, Money, Credit, and the Macroeconomy. Oxford Review of Economic Policy, 24, 180-205. doi:10.1093/oxrep/grn009
Grossmann, A., Love, I., & Orlov, A. G. (2014). The Dynamics of Exchange Rate Volatility: A Panel VAR Approach. Journal of International Financial Markets, Institutions and Money, 33, 1-27. doi:10.1016/j.intfin.2014.07.008
Harding, D., & Pagan, A. (2002). Dissecting the Cycle: A Methodological Investigation. Journal of Monetary Economics, 49, 365-81. doi:10.1016/S0304-3932(01)00108-8
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for Unit Roots in Heterogeneous Panels. Journal of Econometrics, 115, 53-74. doi:10.1016/S0304-4076(03)00092-7
IMF. (2014). Staff Guidance Note on Macroprudential Policy - Detailed Guidance on Instruments. Policy Paper, International Monetary Fund (IMF).
Kahou, M. E., & Lehar, A. (2017). Macroprudential Policy: A Review. Journal of Financial Stability, 29, 92-105. doi:10.1016/j.jfs.2016.12.005
Kim, C. (2014). Macroprudential Policies in Korea – Key Measures and Experiences. Financial Stability Review, 121-130.
Kuttner, K. N., & Shim, I. (2016). Can Non-interest Rate Policies Stabilize Housing Markets? Evidence from a Panel of 57 Economies. Journal of Financial Stability, 26, 31-44. doi:10.1016/j.jfs.2016.07.014
Love, I., & Zicchino, L. (2006). Financial Development and Dynamic Investment Behavior: Evidence from Panel VAR. The Quarterly Review of Economics and Finance, 46, 190-210. doi:10.1016/j.qref.2005.11.007
Nickell, S. (1981). Biases in Dynamic Models with Fixed Effects. Econometrica, 49, 1417-26. doi:10.2307/1911408
Perotti, E., & Suarez, J. (2011). A Pigovian Approach to Liquidity Regulation. International Journal of Central Banking, 7, 3-41.
Pesaran, M. H. (2007). A Simple Panel Unit Root Test in the Presence of Cross-section Dependence. Journal of Applied Econometrics, 22, 265-312. doi:10.1002/jae.951
Reinhardt, D., & Sowerbutts, R. (2015). Regulatory Arbitrage in Action: Evidence from Banking Flows and Macroprudential Policy. Working papers, Bank of England. Retrieved from https://ideas.repec.org/p/boe/boeewp/0546.html
Rüffer, R., & Stracca, L. (2006). What is Global Excess Liquidity, and Does it Matter? Working Paper Series, European Central Bank.
Sousa, J., & Zaghini, A. (2004). Monetary Policy Shocks in the Euro Area and Global Liquidity Spillovers. Working Paper Series, European Central Bank.
Ünsal, D. F. (2013). Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses. International Journal of Central Banking, 9, 233-85.
Zhang, L., & Zoli, E. (2016). Leaning Against the Wind: Macroprudential Policy in Asia. Journal of Asian Economics, 42, 33-52. doi:10.1016/j.asieco.2015.11.001