Friend or Foe? Cross-Border Linkages, Contagious Banking Crises, and 'Coordinated' Macroprudential Policies

45 Pages Posted: 8 Feb 2018 Last revised: 21 Mar 2018

See all articles by Seung Mo Choi

Seung Mo Choi

International Monetary Fund (IMF)

Laura E. Kodres

International Monetary Fund (IMF) - Research Department

Jing Lu

International Monetary Fund (IMF)

Date Written: January 2018

Abstract

This paper examines whether the coordinated use of macroprudential policies can help lessen the incidence of banking crises. It is well-known that rapid domestic credit growth and house price growth positively influence the chances of a banking crisis. As well, a crisis in other countries with high trade and financial linkages raises the crisis probability. However, whether such 'contagion effects' can operate to reduce crisis probabilities when highly linked countries execute macroprudential policies together has not been fully explored. A dataset documenting countries' use of macroprudential tools suggests that a 'coordinated' implementation of macroprudential policies across highly-linked countries can help to stem the risks of widespread banking crises, although this positive effect may take some time to materialize.

Keywords: Banking crisis, Financial crisis, Trade Linkages, Financial Linkages, Macroprudential Policies, Financial Aspects of Economic Integration, International Policy Coordination and Transmission

JEL Classification: F36, F42, G21

Suggested Citation

Choi, Seung Mo and Kodres, Laura E. and Lu, Jing, Friend or Foe? Cross-Border Linkages, Contagious Banking Crises, and 'Coordinated' Macroprudential Policies (January 2018). IMF Working Paper No. 18/9, Available at SSRN: https://ssrn.com/abstract=3120343

Seung Mo Choi (Contact Author)

International Monetary Fund (IMF) ( email )

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

Laura E. Kodres

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

700 19th Street NW
Washington, DC 20431
United States
202-623-6161 (Phone)
202-623-6339 (Fax)

Jing Lu

International Monetary Fund (IMF) ( email )

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

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