Spillovers at the Extremes: The Macroprudential Stance and Vulnerability to the Global Financial Cycles

62 Pages Posted: 4 Jan 2022

See all articles by Anusha Chari

Anusha Chari

University of North Carolina (UNC) at Chapel Hill - Department of Economics; National Bureau of Economic Research (NBER); University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School; Centre for Economic Policy Research (CEPR)

Karlye Dilts Stedman

University of North Carolina (UNC) at Chapel Hill, College of Arts and Sciences, Department of Economics; Federal Reserve Bank of Kansas City

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: December 2021

Abstract

Prior evidence suggests that macroprudential policy has small and insignificant effects on the volume of portfolio flows. We show, however, that these minor effects mask very different relationships across the global financial cycle. A tighter ex-ante macroprudential stance amplifies the impact of global risk shocks on bond and equity flows—increasing outflows by significantly more during risk-off episodes and increasing inflows significantly more during risk-on episodes. These amplification effects are more prominent at the “extremes”, especially for extreme risk-off periods, and are larger for regulations that target specific risks (such as currency or housing exposures) than those which strengthen generalized cyclical buffers (such as the CCyB). This paper estimates these relationships using a policy-shocks approach that corrects for reverse causality by combining high-frequency risk measures with weekly data on portfolio investment and a new measure of macroprudential regulations that captures the intensity of policy stances. Overall, the results support a growing body of evidence that macroprudential regulation can reduce the volume and volatility of bank flows, but shift risks in ways that aggravate vulnerabilities in other parts of the financial system.

Suggested Citation

Chari, Anusha and Dilts Stedman, Karlye and Dilts Stedman, Karlye and Forbes, Kristin J., Spillovers at the Extremes: The Macroprudential Stance and Vulnerability to the Global Financial Cycles (December 2021). Federal Reserve Bank of Kansas City Working Paper No. 21-16, Available at SSRN: https://ssrn.com/abstract=3991050 or http://dx.doi.org/10.2139/ssrn.3991050

Anusha Chari (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

McColl Building
Chapel Hill, NC 27599-3490
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Karlye Dilts Stedman

University of North Carolina (UNC) at Chapel Hill, College of Arts and Sciences, Department of Economics ( email )

Chapel Hill, NC 27599
United States

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E62-416
Cambridge, MA 02142
United States
617-253-8996 (Phone)

HOME PAGE: http://web.mit.edu/kjforbes/www

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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