Working Paper: CEPR ID: DP14948
Authors: Katharina Bergant; Francesco Grigoli; Niels-Jakob Hansen; Damiano Sandri
Abstract: We show that macroprudential regulation can considerably dampen the impact of global financial shocks on emerging markets. More specifically, a tighter level of regulation reduces the sensitivity of GDP growth to VIX movements and capital flow shocks. A broad set of macroprudential tools contribute to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky forms of credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. These findings on the benefits of macroprudential regulation are particularly notable since we do not find evidence that stricter capital controls provide similar gains.
Keywords: macroprudential policies; monetary policy; capital controls
JEL Codes: F3; F4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroprudential regulation (G18) | GDP growth (O49) |
| global financial shocks (F65) | GDP growth (O49) |
| macroprudential regulation (G18) | sensitivity of GDP growth to global financial shocks (F62) |
| macroprudential regulation (G18) | countercyclical monetary policy response (E52) |
| global financial shocks (F65) | countercyclical monetary policy response (E52) |
| macroprudential regulation (G18) | growth during favorable conditions (O44) |