Working Paper: CEPR ID: DP15198
Authors: Kristin Forbes
Abstract: Countries are using macroprudential tools more actively with the goal of improving the resilience of their broader financial systems. A growing body of evidence suggests that these tools can accomplish specific domestic goals and should reduce country vulnerability to many domestic and international shocks. The evidence also suggests, however, that these policies are not an elixir. They will not insulate economies from volatility and they generate leakages to the non-bank financial system and spillovers through international borrowing, lending and other cross-border exposures. Some of these unintended consequences can mitigate the effectiveness of macroprudential policies and generate new vulnerabilities and risks. The “Corona Crisis” provides a lens to evaluate the effectiveness of current macroprudential regulations during a period of extreme market volatility and economic stress. Experience to date suggests that macroprudential tools provide some benefits and should remain a focus of macroeconomic policy, but with realistic expectations about what they can accomplish.
Keywords: macroprudential; capital-flow measures; bank regulation; spillovers
JEL Codes: E44; E5; F33; F36; F38; G21; G23; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroprudential tools (E61) | reduce domestic credit growth (E51) |
| macroprudential tools (E61) | reduce bank exposure to foreign currency borrowing (F65) |
| macroprudential tools (E61) | stabilize domestic financial systems (F65) |
| macroprudential tools (E61) | limit international capital flows (F32) |
| tighter macroprudential stances (E60) | better performance in equity markets during the corona crisis (E44) |
| tighter macroprudential stances (E60) | smaller decline in equity markets (G19) |
| tighter macroprudential stances (E60) | credit default swap rates (E43) |
| tighter macroprudential stances (E60) | GDP growth (O49) |