Working Paper: NBER ID: w29670
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; portfolio flows; global financial cycle; risk shocks
JEL Codes: E58; F3; G15; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tighter ex-ante macroprudential stance (E61) | amplifies impact of global risk shocks on bond and equity flows (F65) |
| tighter ex-ante macroprudential stance (E61) | increased outflows during risk-off episodes (F65) |
| tighter ex-ante macroprudential stance (E61) | heightened inflows during risk-on episodes (F65) |
| one standard deviation increase in regulatory stance (G18) | 30.96% increase in bond outflows (F21) |
| tighter macroprudential regulations (G28) | increased sensitivity to risk shocks outside the banking sector during extreme events (F65) |