Effectiveness and Channels of Macroprudential Instruments: Lessons from the Euro Area

33 Pages Posted: 28 Mar 2016

See all articles by Thierry Tressel

Thierry Tressel

International Monetary Fund (IMF) - Research Department

Y. Sophia Zhang

International Monetary Fund (IMF)

Date Written: January 2016

Abstract

The crisis has highlighted the importance of setting up macro-prudential oversight frameworks, having effective macro-prudential instruments in place to be called upon to mitigate growing financial imbalances as needed. We develop a new approach using the euro area Bank Lending Survey to assess the effectiveness of macro-prudential policies in containing credit growth and house price appreciation in mortgage markets. We find instruments targeting the cost of bank capital most effective in slowing down mortgage credit growth, and that the impact is transmitted mainly through price margins, the same banking channel as monetary policy. Limits on loan-to-value ratios are also effective, especially when monetary policy is excessively loose.

Keywords: LTV ratios, capital requirement, mortage, bank lending, lending, monetary policy, instruments, mortgage, credit growth, General,

JEL Classification: E32, E40, E50, G01, G21

Suggested Citation

Tressel, Thierry and Zhang, Y. Sophia, Effectiveness and Channels of Macroprudential Instruments: Lessons from the Euro Area (January 2016). IMF Working Paper No. 16/4. Available at SSRN: https://ssrn.com/abstract=2754945

Thierry Tressel (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Y. Sophia Zhang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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