Working Paper: CEPR ID: DP16889
Authors: Anusha Chari; Karlye Dilts Stedman; Kristin Forbes
Abstract: The effects of macroprudential policy on portfolio flows vary considerably across the global financial cycle. A tighter ex-ante macroprudential stance amplifies the impact of global risk shocks on bond and equity flows, increasing outflows significantly more during risk-off episodes and increasing inflows significantly more during risk-on episodes. These amplification effects are more prominent at the “extremes,” especially for extreme risk-off periods and for regulations that target specific risks instead of generalized cyclical buffers. This paper estimates these relationships using a policy-shocks approach that corrects for reverse causality by combining high-frequency risk measures with weekly data on portfolio investment and a new measure of macroprudential regulations that captures the intensity of policy stances. Overall, the results support a growing body of evidence that macroprudential regulation can reduce the volume and volatility of bank flows but shift risks in ways that aggravate vulnerabilities in other parts of the financial system.
Keywords: macroprudential policy; risk-on; risk-off; sudden stops; global financial cycle
JEL Codes: F3; F65; G2; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tighter macroprudential stance (E63) | amplifies impact of global risk shocks (F65) |
| global risk shocks (F65) | bond and equity flows (F21) |
| tighter macroprudential stance + global risk shocks (F65) | larger capital inflows during risk-on periods (F65) |
| tighter macroprudential stance + global risk shocks (F65) | larger capital outflows during risk-off periods (F32) |
| tighter macroprudential stance (E63) | stronger amplification effects for bond flows than equity flows (F32) |
| macroprudential tools targeting foreign exchange exposures and bank credit supply (F31) | more substantial impacts (F69) |
| macroprudential regulations (G28) | improve resilience of the banking system (F65) |
| macroprudential regulations (G28) | shift financial intermediation to less stable entities (G21) |
| shift in financial intermediation (G21) | increase vulnerabilities in other sectors of the financial system (F65) |