Electoral Cycles in Macroprudential Regulation

Abstract

Macroprudential measures have become part of the macroeconomic policy toolkit in many countries. However, little is known about the potential political limitations in implementing such policies. In this paper, I show that changes to macroprudential regulation exhibit a predictable electoral cycle in the run-up to 212 elections across 58 countries from 2000 through 2014. Consistent with theories of opportunistic political cycles, regulations aimed at mortgages and consumer credit are systematically less likely to be tightened prior to elections during boom times or when election outcomes are uncertain. In contrast to monetary policy, I find very limited evidence that central bank independence helps alleviate cycles in macroprudential policy. Taken at face value, these results suggest that post-crisis financial regulations may be subject to more severe political pressures than previously acknowledged.

Keywords: Macroprudential Regulation, Electoral Cycle, Regulatory Cycle, Political Economy, Central Bank Independence

JEL Classification: G18, G21, G28, D72, D73, P16