Conditions for Effective Macroprudential Policy Interventions

37 Pages Posted: 5 May 2020

See all articles by Fahad Khan

Fahad Khan

Asian Development Bank

Arief Ramayandi

Asian Development Bank - Economic Research

Marcel Schröder

Lebanese American University

Date Written: Feb 25, 2020

Abstract

This paper aims at identifying effective macroprudential policy (MPP) interventions and analysing the macroeconomic conditions that promote them. We define effective MPP interventions as those that stabilize its underlying target variable, such as credit growth, house price growth, etc. For our analysis, we construct a new database that documents the use of a large number of MPP instruments for 61 advanced and emerging market economies from 2000 to 2016. The new feature of the database is that it maps every recorded MPP intervention in these economies and over this period to stabilize a specific target variable category for banking, health, domestic loans, the exchange rate, foreign capital movements, and house prices. Using this dataset, we introduce a practical way for defining the macroprudential policy effectiveness. We find that MPP interventions are more likely to be effective when several prudential measures are taken together, but at the same time avoid the diminishing returns of repeated MPP tightening. Monetary tightening seems to override the effectiveness of MPP instruments. The output gap, credit cycle, external debt, current account, and global risk appetite also count for the likelihood of MPP successes. The paper provides a guideline for the effective conduct of MPPs.

Keywords: effectiveness, financial stability, macroprudential policy, probabilistic analysis

JEL Classification: E32, E58, G15, G28

Suggested Citation

Khan, Fahad and Ramayandi, Arief and Schröder, Marcel, Conditions for Effective Macroprudential Policy Interventions (Feb 25, 2020). Asian Development Bank Economics Working Paper Series No. 609, Available at SSRN: https://ssrn.com/abstract=3590936 or http://dx.doi.org/10.2139/ssrn.3590936

Fahad Khan

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Arief Ramayandi (Contact Author)

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Marcel Schröder

Lebanese American University ( email )

P.O.Box 36
Chouran-Beirut 1102 2801
Byblos
Lebanon

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