Working Paper: NBER ID: w29346
Authors: Katharina Bergant; Kristin Forbes
Abstract: This paper uses the initial phase of the COVID-19 pandemic to examine how macroprudential frameworks developed over the past decade performed during a period of heightened financial and economic stress. It discusses a new measure of the macroprudential stance that better captures the intensity of different policies across countries and time. Then it shows that macroprudential policy has been used countercyclically—with stances tightened during the 2010’s and eased in response to COVID-19 by more than previous risk-off periods. Countries that tightened macroprudential policy more aggressively before COVID, as well as those that eased more during the pandemic, experienced less financial and economic stress. Countries’ ability to use macroprudential policy, however, was significantly constrained by the extent of existing “policy space”, i.e., by how aggressively policy was tightened before COVID-19. The use of macroprudential tools was not significantly affected by the space available to use other policy tools (such as fiscal policy, monetary policy, FX intervention, and capital flow management measures), and the use of other tools was not significantly affected by the space available to use macroprudential policy. This suggests that although macroprudential tools are being used countercyclically and should therefore help stabilize economies and financial markets, there appears to be an opportunity to better integrate the use of macroprudential tools with other policies in the future.
Keywords: macroprudential policy; COVID-19; financial stability; policy space
JEL Codes: E58; E61; E63; F38; G18; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pre-COVID macroprudential tightening (E44) | subsequent economic stress (E65) |
| macropudential policy adjustments (E60) | financial and economic stress during COVID-19 (F65) |
| easing macroprudential policy during the pandemic (E44) | economic stress (E66) |
| macroprudential tools use not significantly affected by other policy tools availability (E61) | interaction between macroprudential policy adjustments and other policies (E61) |