Electoral Cycles in Macroprudential Regulation

Abstract

Do politics matter for macroprudential policy? I show that changes to macroprudential regulation exhibit a predictable electoral cycle in the run-up to 221 elections across 58 countries from 2000 through 2014. Policies restricting mortgages and consumer credit are systematically looser before elections, particularly during credit booms and economic expansions. Consistent with theories of opportunistic political cycles, this pattern is stronger when election outcomes are uncertain, regulators are closely tied to politicians, and institutions are poor. These results suggest that political pressures may limit the ability of macroprudential regulators to “lean against the wind.”

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

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