Global Financial Cycle, Household Credit, and Macroprudential Policies

Abstract

We show that macroprudential policies dampen the impact of global financial conditions on local bank credit cycles. For identification, we exploit exogenous variation in the U.S. VIX and household and business credit registers in a small open economy, where banks depend on foreign funding and macroprudential measures vary over a full boom-bust cycle. When the VIX is low, tighter macroprudential policies (i) reduce household lending, notably for riskier (FX and high DSTI) loans and by banks dependent on foreign funding and (ii) increase local currency lending to real-estate firms, while leaving business lending to other firms unchanged. Furthermore, such periods are associated with (iii) less total lending (to households and firms) and with a lower share of FX loans at the local level, suggesting a compositional shift toward (less risky) local currency loans. As a result, when the VIX is low, tighter macroprudential policies (iv) dampen house prices and economic activity in areas with higher FX-loans.

Keywords: global financial cycle, macroprudential policies, boom-bust credit cycle, bank loans to households and firms, credit registry, emerging marketss

JEL Classification: G01, G21, G28, F30, E58