The interaction between macroprudential policy and monetary policy: Overview

Abstract

This paper presents the main findings of an International Banking Research Network initiative examining the interaction between monetary policy and macroprudential policy in determining international bank lending. We give an overview on the data, empirical specifications and results of the seven papers from the initiative. The papers are from a range of core and smaller advanced economies, and emerging markets . The main findings are as follows. First, there is evidence that macroprudential policy in recipient countries can partly offset the spillover effects of monetary policy conducted in core countries. Meanwhile, domestic macroprudential policy in core countries can also affect the cross‐border transmission of domestic monetary policy via lending abroad, by limiting the increase in lending by less strongly capitalized banks. Second, the findings highlight that studying heterogeneities across banks provides complementary insights to studies using more aggregate data and focusing on average effects. In particular, we find that individual bank characteristics such as bank size or GSIB status play a first‐order role in the transmission of these policies. Finally, the impacts differ considerably across prudential policy instruments, which also suggests the importance of more granular analysis.

Capital flow management and monetary policy to control credit growth

“…The hypothesis underpinning the analysis is that US monetary policy has a spillover effect on the domestic monetary policy of EMEs, which react immediately to these international shifts (Bhattarai et al, 2021; Bussiere et al, 2021; Chen & Filardo, He, et al, 2014; Coman & Lloyd, 2022). Potentially, the central banks in EMEs conduct CFM and monetary policies together, then it is useful to incorporate the proxies of these policies in our baseline estimation and prevent omitted variable bias.…”

Exploring the nexus among the Macroprudential Policies, Funding Liquidity Risk and bank risk of Commercial Banks in Leading South East Asian Economies

“…After the subprime crisis, the global regulating authority have started focusing on the macro prudential policy as a solution to manage the excessive risk-taking behavior of the banking industry. The development of macroprudential legislation should be pursued with the goals of lowering the level of systemic risk, reducing the negative impact of financial crises on the economy, and increasing the robustness of the financi al system (Bussière et al, 2021).The liquidity crunch, appeared in limelight after the crisis, as the Claudio Borio wrote on Vox a decade ago, "We are all macroprudential now. One of the methods adopted by an international regulatory agency such as the Bank of International Settlement (BIS) to control banking risks is the liquidity coverage ratio, often known as the liquidity coverage ratio (LCR).…”

Monetary policy, prudential policy and bank's risk‐taking: A literature review

“…For instance, macroprudential tightening in the UK mitigates the negative impact of US monetary tightening on USDdenominated cross-border bank lending outflows from UK banks. These findings are comforted by Bussière et al (2021) who explore the impact of the interaction of monetary and macroprudential policy on the cross-border transmission of policy through global banks. They evidence that the spillover effects of monetary policy conducted in core countries can be partly offset by macroprudential policy in recipient countries.…”

“…These findings are important since they prove the possibility for macroprudential policy in the source countries to mitigate the international spillover effects from domestic monetary policy. However, the effectiveness of macroprudential policy differ according to the instrument, leading Bussière et al (2021) to appeal for a more granular analysis.…”

“…Evaluation of the effectiveness of macroprudential tools and their interaction with monetary policy Macroprudential policies (MaPs) stabilize credit cycle, with greater impact when reinforced by monetary policy Bussière et al (2021) Analysis of the impact of the interaction of monetary and macroprudential policy on the cross-border transmission of policy.…”