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Effectiveness and channels of macroprudential policies: lessons from the Euro area

Effectiveness and channels of macroprudential policies: lessons from the Euro area PurposeThe design of a macro-prudential framework and its interaction with monetary policy has been at the forefront of the policy agenda since the global financial crisis. However, most advanced economies (AEs) have little experience using macroprudential policies. As a result, relatively little is known empirically about macroprudential instruments’ effectiveness in mitigating systemic risks in these countries, about their channels of transmission, and about how these instruments would interact with monetary policy. This paper aims to fill in the gap.Design/methodology/approachThe authors develop a new approach using the euro area bank lending survey to assess the effectiveness of macro-prudential policies in containing credit growth and house price appreciation in mortgage markets. Estimation is performed under the panel regressions (OLS, GLS) and panel VAR setup. Endogeneity issues arising from measures of macro-prudential policies are addressed by introducing GMM estimation and various instruments.FindingsThe authors find instruments targeting the cost of bank capital most effective in slowing down mortgage credit growth, and that the impact is transmitted mainly through price margins, the same banking channel as monetary policy. Limits on loan-to-value ratios are also effective, especially when monetary policy is excessively loose.Originality/valueWith limited data on macroprudential policy measures in the AEs, this paper proposed a new methodology of using answers from bank lending survey as proxies to assess the effectiveness of specific macroprudential measures and their transmission channels. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Regulation and Compliance Emerald Publishing

Effectiveness and channels of macroprudential policies: lessons from the Euro area

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References (38)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1358-1988
DOI
10.1108/JFRC-10-2016-0094
Publisher site
See Article on Publisher Site

Abstract

PurposeThe design of a macro-prudential framework and its interaction with monetary policy has been at the forefront of the policy agenda since the global financial crisis. However, most advanced economies (AEs) have little experience using macroprudential policies. As a result, relatively little is known empirically about macroprudential instruments’ effectiveness in mitigating systemic risks in these countries, about their channels of transmission, and about how these instruments would interact with monetary policy. This paper aims to fill in the gap.Design/methodology/approachThe authors develop a new approach using the euro area bank lending survey to assess the effectiveness of macro-prudential policies in containing credit growth and house price appreciation in mortgage markets. Estimation is performed under the panel regressions (OLS, GLS) and panel VAR setup. Endogeneity issues arising from measures of macro-prudential policies are addressed by introducing GMM estimation and various instruments.FindingsThe authors find instruments targeting the cost of bank capital most effective in slowing down mortgage credit growth, and that the impact is transmitted mainly through price margins, the same banking channel as monetary policy. Limits on loan-to-value ratios are also effective, especially when monetary policy is excessively loose.Originality/valueWith limited data on macroprudential policy measures in the AEs, this paper proposed a new methodology of using answers from bank lending survey as proxies to assess the effectiveness of specific macroprudential measures and their transmission channels.

Journal

Journal of Financial Regulation and Compliance – Emerald Publishing

Published: Jul 10, 2017

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