Search results
1 – 10 of 500
The global financial crisis demonstrated that monetary policy alone cannot ensure both price and financial stability. According to the Tinbergen (1952) rule, there was a gap in…
Abstract
Purpose
The global financial crisis demonstrated that monetary policy alone cannot ensure both price and financial stability. According to the Tinbergen (1952) rule, there was a gap in the policymakers’ toolkit for safeguarding financial stability, as the number of available policy instruments was insufficient relative to the number of policy objectives. That gap is now being closed through the creation of new macroprudential policy instruments. Both monetary policy and macroprudential policy have the capacity to influence both price and financial stability objectives. This paper develops a framework for determining how best to assign instruments to objectives.
Design/methodology/approach
Using a simplified New-Keynesian model, the authors examine two sets of policy trade-offs, the first concerning the relative effectiveness of monetary and macroprudential policy instruments in achieving price and financial stability objectives and the second concerning trade-offs between macroprudential policy instruments themselves.
Findings
This model shows that regardless of whether the objective is to enhance financial system resilience or to moderate the financial cycle, macroprudential policies are more effective than monetary policy. Likewise, monetary policy is more effective than macroprudential policy in achieving price stability. According to the Mundell (1962) principle of effective market classification, this implies that macroprudential policy instruments should be paired with financial stability objectives, and monetary policy instruments should be paired with the price stability objective. The authors also find a trade-off between the two sets of macroprudential policy instruments, which indicates that failure to moderate the financial cycle would require greater financial system resilience.
Originality/value
The main contribution of the paper is to establish – with the help of a model framework – the relative effectiveness of monetary and macroprudential policies in achieving price and financial stability objectives. By so doing, it provides a rationale for macroprudential policy and it shows how macroprudential policy can unburden monetary policy in leaning against the wind of financial imbalances.
Details
Keywords
Victoria Cociug and Larisa Mistrean
Introduction: The COVID-19 crisis is a major shock to the global economy, with serious repercussions on financial markets. Most economies, especially high-income ones, have made…
Abstract
Introduction: The COVID-19 crisis is a major shock to the global economy, with serious repercussions on financial markets. Most economies, especially high-income ones, have made considerable efforts, including financial ones, to stimulate aggregate demand in the face of a loss of income on the one hand and to maintain the production potential of companies on the other. This fact required the intervention through various instruments on the money market, but also the mention of the money creation capacity of the banks through the lending mechanism. Apparently, this should have affected the stability of banking systems by increasing the credit risk assumed, but this was avoided because banks are better capitalised and the regulatory framework, including the macroprudential one, was strengthened after the financial crisis of 2007–2009. Therefore, the national authorities had sufficient leeway to respond to the recession and market instability caused by the pandemic by relaxing prudential requirements.
Aim: A theoretical review of literature and good practice of developed banking systems on how macroprudential policy can supplement expansionary monetary policy in overcoming the pandemic crisis. Identifying the risks for the excessive use of relaxed macroprudentialism and formalising recommendations to combine it with monetary policy instruments to overcome stressful situations for banking systems.
Method: In order to study the subject approached in this chapter, there were applied the following research methods, such as analysis and synthesis of conceptual approaches of macroprudentiality and the tools they use, deduction and induction, in order to elucidate the influencing factors using the relaxation of macroprudentiality in the context of pandemic crisis and research on the high-income states experience in order to formulate conclusions and opinions.
Findings: The authors find that countries have responded quickly to the outbreak of the crisis by easing capital and liquidity requirements, or at least refraining from the previously planned tightening. At the same time, the authors noticed that loan-based measures and minimum reserve requirements were rarely relaxed and risk weights were not changed at all.
Originality of the Study: The correlation of different monetary and macroprudential policy instruments in the need to relax them, the analysis of possible risks and the formulation of conclusions on the usefulness of applying these methods to solve the economic effects of the COVID-19 pandemic.
Implications: Our results suggest that the macroprudential instruments can only be applied if banking systems have previously succeeded in consolidating the capitalisation of banks. A restrictive macroprudential policy can create premises for the use of excess capital in situations such as that generated by the pandemic, but it is recommended only to economies where overregulation does not affect development in periods of normal evolution.
Details
Keywords
Francesco Busato, Maria Ferrara and Monica Varlese
This paper analyzes real and welfare effects of a permanent change in inflation rate, focusing on macroprudential policy’ role and its interaction with monetary policy.
Abstract
Purpose
This paper analyzes real and welfare effects of a permanent change in inflation rate, focusing on macroprudential policy’ role and its interaction with monetary policy.
Design/methodology/approach
While investigating disinflation costs, the authors simulate a medium-scale dynamic general equilibrium model with borrowing constraints, credit frictions and macroprudential authority.
Findings
Providing discussions on different policy scenarios in a context where still it is expected high inflation, there are three key contributions. First, when macroprudential authority actively operates to improve financial stability, losses caused by disinflation are limited. Second, a Taylor rule directly responding to financial variables might entail a trade-off between price and financial stability objectives, by increasing disinflation costs. Third, disinflation is welfare improving for savers, while costly for borrowers and banks. Indeed, while savers benefit from policies reducing price stickiness distortion, borrowers are worried about credit frictions, coming from collateral constraint.
Practical implications
The paper suggests threefold policy implications: the macroprudential authority should actively intervene during a disinflation process to minimize costs and financial instability deriving from it; policymakers should implement a disinflationary policy stabilizing also output; the central bank and the macroprudential regulator should pursue financial and price stability goals, separately.
Originality/value
This paper is the first attempt to study effects of a permanent inflation target reduction in focusing on the macroprudential policy’ role.
Details
Keywords
Tomáš Konečný and Lukáš Pfeifer
This paper aims to focus on capital-related macroprudential policies in the context of recent policy discussions on the removal of barriers to the mobility of capital and…
Abstract
Purpose
This paper aims to focus on capital-related macroprudential policies in the context of recent policy discussions on the removal of barriers to the mobility of capital and liquidity of cross-border banks in the European Union (EU).
Design/methodology/approach
This study first discusses the link between financial stability and internal resource mobility of cross-border banks. Then, it examines past heterogeneity in structural capital buffers as key macroprudential capital instruments applied in the EU and relate them to costs of policy action, degree of foreign penetration and membership in the Banking Union.
Findings
Observed phase-in patterns of structural capital buffers in the EU are broadly consistent with costs of policy action, degree of foreign penetration and membership in the Banking Union as potential factors. The process of financial integration could be further enhanced through reduced uncertainty in the application of macroprudential policies that constrain capital mobility of cross-border banks.
Originality/value
This paper anchors macroprudential policies into a wider discussion on the mechanism and implications of ring-fencing in the EU over time. It discusses two policy areas, macroprudential policies and proposals for deeper financial integration, that share the same financial stability objective but tend to emphasize different implications of the mobility of capital and liquidity of cross-border banks in the EU. The study provides a discussion of potential implications of the recent adoption of the CRRII/CRDV legislation for future heterogeneity of macroprudential policies in the EU.
Details
Keywords
Dinh Trung Nguyen and Nguyen Hanh Luu
This paper aims to examine the impacts of macroprudential policy on the shadow economy worldwide.
Abstract
Purpose
This paper aims to examine the impacts of macroprudential policy on the shadow economy worldwide.
Design/methodology/approach
We compile a panel dataset covering 125 countries from 1990 to 2018. This paper mitigates potential endogeneity issues via two-stage least squares and the two-step generalized method of moments (GMM).
Findings
The robust results show that the overall tightening of macroprudential policies exerts an expansion impact on the shadow economy. Further examination of the 16 individual macroprudential policy instruments finds that loan restrictions, countercyclical buffers, surcharges for systemically important financial institutions and capital conservation buffers have positive and statistically significant effect on the shadow economy. This relationship is only present during tightening episodes of macroprudential policy as loosening episodes do not exhibit any significant impact. Finally, this paper documents the nonlinear effects of macroprudential policy.
Practical implications
The results suggest that the supervisory authorities may need to consider another parameter, which is the development of the shadow economy, when devising the optimal macroprudential policy responses.
Originality/value
To the best of the authors’ knowledge, this paper is likely the first to empirically document the impact of macroprudential policy on the shadow economy. It contributes to the growing literature on the potential side effects of macroprudential policy on the macro-economy.
Details
Keywords
Lúcio Guimarães Moscareli, Mathias Schneid Tessmann, Lucas Souza Beppler and Régis Augusto Ely
This paper aims to investigate the effects of macroprudential policies in Brazil on the banking sector.
Abstract
Purpose
This paper aims to investigate the effects of macroprudential policies in Brazil on the banking sector.
Design/methodology/approach
Autoregressive models with distributed lags (ADL) are estimated to verify whether such regulatory measures affected the volume of credit, the banking spread and the concentration index of the five largest Brazilian banks. In addition to the variables of interest, monthly macroeconomic data from 2011 to 2021 are considered.
Findings
Our results suggest that macroprudential policies are effective in reducing credit volume. More importantly, our findings highlight two possible adverse effects of these instruments. Firstly, macroprudential tightenings are associated with increases in bank spread. Secondly, tightening measures contribute to increasing bank market concentration.
Originality/value
These findings are useful for the scientific literature that investigates the regulation of the financial system by providing empirical evidence of the effects of Brazilian macroprudential measures on investors, policymakers and other economic agents whose well-being is associated with economic stability.
Details
Keywords
The purpose of the paper is to study the relevance of macroprudential policies (MPPs) in influencing bank lending in small open economies with dual banking systems.
Abstract
Purpose
The purpose of the paper is to study the relevance of macroprudential policies (MPPs) in influencing bank lending in small open economies with dual banking systems.
Design/methodology/approach
In the analysis, the author employed the dynamic panel data methodology as compared to alternate techniques since it is able to address potential endogeneity challenges.
Findings
Using quarterly data from the period 2002–2020, the author finds that MPPs are highly effective in containing the growth of public credit, whereas its impact on private credit is much less effective. The disaggregated findings reveal that macroprudential measures are less effective in containing the growth of private credit by Islamic banks.
Originality/value
The majority of studies on MPPs are focused on emerging and advanced economies, limiting their policy appeal from the standpoint of small open economies. In this connection, this paper contributes to the literature on the relevance of such policies for a small open economy with a dual banking system and significant hydrocarbon exports. The paper's analysis therefore holds relevance for similar economies, both in the region and elsewhere, on the role and relevance of MPPs with emphasis on Islamic banks.