Is Macroprudential Policy Instrument Blunt?

62 Pages Posted: 15 Jan 2016

See all articles by Katsurako Sonoda

Katsurako Sonoda

Bank of Japan - Financial System and Bank Examination Department

Nao Sudou

Bank of Japan

Date Written: January 2016

Abstract

Since the global financial crisis of 2008, macroprudential instruments have attracted an increasing amount of attention as potentially the best tools for stabilizing boom-and-bust cycles. This is because, in contrast to short-term interest rates, macroprudential instruments are regarded as particularly precise tools that act only on the area of concern. In this paper, we conduct an empirical examination to determine if this is the case by studying relevant areas of the Japanese economy from the 1970s to 1990s. We focus on a policy instrument called Quantitative Restriction (QR) implemented by the government. QR explicitly required banks to curb their lending to the real estate industry and related activities, and was used in the wake of the credit boom. We construct shocks to QR using narrative records of the government, and estimate their impact on the macroeconomy. We find that QR affected the aggregate economy as well as the real estate sector and land prices. In order to see why QR was a "blunt" instrument, we conduct a cross-sectional analysis using individual bank data and disaggregated industry group data. We find evidence that shocks to QR affected the aggregate economy by damaging the balance sheets of banks and non-financial firms.

Keywords: Short-term interest rates, macroprudential instrument, boom-and-bust cycle

JEL Classification: E20, J11

Suggested Citation

Sonoda, Katsurako and Sudou, Nao, Is Macroprudential Policy Instrument Blunt? (January 2016). BIS Working Paper No. 536, Available at SSRN: https://ssrn.com/abstract=2715602

Katsurako Sonoda (Contact Author)

Bank of Japan - Financial System and Bank Examination Department ( email )

2-1-1, Hongoku-cho
Nihonbashi
Chuo-ku, Tokyo, 103-8660
Japan

Nao Sudou

Bank of Japan ( email )

CPO Box 203
Tokyo, 100-91
Japan

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