Monetary and macroprudential policies, output, prices, and financial stability

In this chapter, the concept of financial instability is examined in terms of the policy instruments used by central banks. Although the policy instruments used in each country differ according to the country conditions, it is thought that the common factor among developing countries with a current account deficit problem is exchange rate volatility resulting from excessive credit growth and short-term capital movements. In this context, Argentina, Brazil, Chile, Colombia, Hungary, Indonesia, India, Mexico, Poland, South Africa, and Turkey are examined with regard to the effects of macroprudential policies on financial stability for the period between Q2 of 2006 and Q2 of 2017 by using the time-varying panel causality test developed by Dumitrescu and Hurlin. The results of the analysis indicate that excessive credit growth is a cause of the current account deficit. The same findings are also valid for interest rate. There is no obvious link between the exchange rate and the current account deficit.

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The Impact of US Monetary Policy and Other External Shocks on the Hong Kong Economy

Macroeconomic Shocks and Unconventional Monetary Policy ◽

10.1093/oso/9780198838104.003.0011 ◽

2019 ◽

pp. 239-260

Author(s):

Hongyi Chen ◽

Andrew Tsang

Keyword(s):

Monetary Policy ◽

Hong Kong ◽

Financial Stability ◽

Mainland China ◽

External Shocks ◽

Monetary Policies ◽

Macroprudential Policies ◽

Loan Quality ◽

The Impact ◽

Us Monetary Policy

This chapter uses the factor-augmented vector autoregression framework to study the impact on the Hong Kong economy of the diverging monetary policies by the Fed, the European Central Bank (ECB), and the Bank of Japan (BoJ), as well as the slowdown of the Mainland economy. The empirical results show that shocks in US monetary policy rate mainly affect interest rate-sensitive sectors in Hong Kong and that monetary easing from the ECB and the BoJ somewhat offsets the impact of tightening of the Fed. Real variables such as real GDP growth and the unemployment rate are more sensitive to the economic slowdown in Mainland China. However, Hong Kong’s financial stability, particularly with regard to loan quality, banks’ capital and liquidity, is well maintained by macroprudential policies, suggesting that Hong Kong’s financial system is resilient to external shocks.

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MACRO- AND MICROPRUDENTIAL POLICIES: SWEET AND LOWDOWN IN A CREDIT NETWORK AGENT-BASED MODEL

Macroeconomic Dynamics ◽

10.1017/s1365100519000634 ◽

2019 ◽

pp. 1-20

Author(s):

Ermanno Catullo ◽

Federico Giri ◽

Mauro Gallegati

Keyword(s):

Systemic Risk ◽

Financial Stability ◽

Agent Based Model ◽

Agent Based ◽

Macroprudential Policies ◽

The Stability ◽

The Individual ◽

The Cost ◽

Individual Choices ◽

Credit Network

The paper presents an agent-based model reproducing a stylized credit network that evolves endogenously through the individual choices of firms and banks. We introduce in this framework a financial stability authority in order to test the effects of different prudential policy measures designed to improve the resilience of the economic system. Simulations show that a combination of micro- and macroprudential policies reduces systemic risk but at the cost of increasing banks’ capital volatility. Moreover, the agent-based methodology allows us to implement an alternative meso regulatory framework that takes into consideration the connections between firms and banks. This policy targets only the more connected banks, increasing their capital requirement in order to reduce the diffusion of local shocks. Our results support the idea that the mesoprudential policy is able to reduce systemic risk without affecting the stability of banks’ capital structure.

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Gulf Cooperation Council (GCC)—Oil Prices, Financial Stability, and the Use of Countercyclical Macroprudential Policies in the GCC

Policy Papers ◽

10.5089/9781498343909.007 ◽

2015 ◽

Vol 15 (62) ◽

Cited By ~ 1

Author(s):

Keyword(s):

Financial Services ◽

Financial Stability ◽

Global Financial Crisis ◽

Financial Sector ◽

Oil Price ◽

Loan Loss ◽

Financial Cycle ◽

Macroprudential Policies ◽

Systemic Risks ◽

Wide Range

Economic and financial developments in the GCC economies are interwoven with oil price movements. GCC economies are highly dependent on oil and gas exports. Oil price upturns lead to higher oil revenues, stronger fiscal and external positions, and higher government spending. This boosts corporate profitability and equity prices and strengthens bank balance sheets, but can also lead to the buildup of systemic vulnerabilities in the financial sector. Banks in the GCC are well-capitalized, liquid, and profitable at present, and well-positioned to manage structural systemic risks. However, oil-macro-financial linkages mean that asset quality and liquidity in the financial system may deteriorate in a low oil price environment and financial sector stress may emerge. The scope for amplification of oil price shocks through the financial sector suggests a role for a countercyclical approach to macroprudential policies. Countercyclical macroprudential policy can prove useful to reduce the buildup of systemic risks in the financial sector during upswings, and to cushion against disruption to financial services during periods of financial sector stress. The GCC countries have considerable experience with implementing a wide range of macroprudential policies, but these policies have not generally been adjusted through the cycle. GCC central banks implemented several macroprudential measures before the global financial crisis and have continued to enhance their macroprudential frameworks and toolkits to limit systemic financial sector risks. Although there is some evidence of macroprudential tools being adjusted in a countercyclical way, most of the tools have not been adjusted over the financial cycle. Further enhancements to the GCC macroprudential framework are needed to support the countercyclical use of these policies. A comprehensive and established framework, supported by strong institutional capacity, is essential for countercyclical macroprudential policies. This framework should provide clear assignment of responsibilities and guidance on how policies will be implemented to maintain financial stability and manage systemic risks over the financial cycle. Addressing data gaps and the further development of reliable early warning indicators in signaling potential systemic stress are needed to help guide the countercyclical use of a broad set of macroprudential policies. Expanding the countercyclical policy toolkit and its coverage can help address emerging financial sector risks. The implementation of countercyclical capital buffers and dynamic loan loss provisions could boost resilience in line with systemic risks faced in GCC economies. At the same time, using existing macroprudential policies countercyclically would prove useful to address emerging financial sector risks in a more targeted way. Expanding the coverage of macroprudential tools to nonbanks can help boost effectiveness by reducing leakages.

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FINANCIAL CRISIS, MACROPRUDENTIAL POLICIES AND DEPOSITOR DISCIPLINE

The Singapore Economic Review ◽

10.1142/s021759081740001x ◽

2017 ◽

Vol 62 (01) ◽

pp. 5-25 ◽

Cited By ~ 4

Author(s):

AHMET FARUK AYSAN ◽

MUSTAFA DISLI ◽

HUSEYIN OZTURK

Keyword(s):

Financial Crisis ◽

Financial Stability ◽

Banking Sector ◽

Positive Impact ◽

Bank Performance ◽

Macroprudential Policies ◽

Bank Behavior ◽

Depositor Discipline

This paper examines to what extent macroprudential policies in the Turkish banking sector affected the functioning of depositor discipline. Our results suggest that depositors’ responses for poor bank performance get stronger after the 2008 crisis, when various macroprudential measures were implemented to preserve financial stability. In the aftermath of the crisis, bank behavior toward depositors also alters. Ahead of the crisis, banks did not significantly respond to the discipline exerted by depositors, however, banks begin offering higher rates to curb deposit withdrawals afterwards. Our findings suggest that the implementation of macroprudential tools seem to have a positive impact on financial stability, since, in the post-2008 period, regulatory supervision have been more firmly assisted by the market.

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The Costs and Trade-Offs of Green Central Banking: A Framework for Analysis

Energies ◽

10.3390/en14165168 ◽

2021 ◽

Vol 14 (16) ◽

pp. 5168

Author(s):

Radu Șimandan ◽

Cristian Păun

Keyword(s):

Climate Change ◽

Environmental Sustainability ◽

Financial Stability ◽

Central Banks ◽

Central Banking ◽

Smooth Transition ◽

Low Carbon ◽

Low Carbon Economy ◽

Macroprudential Policies ◽

Trade Offs

The participation of central banks in the fight against climate change has recently been advanced in several academic articles and policy papers. Since the emerging consensus is that climate change poses financial risks, the envisaged green central banking has a responsibility to address environmental sustainability as a means of promoting financial stability—an increasingly accepted goal of central banks in the post-financial crisis world. Thus far, the pro side of the argument is well represented in the literature, though often the benefits remain implicit: with the help of central banks via monetary and macroprudential policies, a smooth transition to a low-carbon economy would be somehow beneficial to all of us. With this article, we aim to add to this literature by looking at the costs and trade-offs of this course of action in light of the observation that the con side of the proposal has been only marginally addressed. We put forward a framework for the analysis of the costs and trade-offs of green central banking and exemplify the applicability of this framework by studying three cases of central banks for which the transition to green operation has been advanced. We find evidence that if costs and trade-offs are taken into account, the case in favor of greening central banks becomes less straightforward than is currently conveyed in the literature.

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Alternative Views on the Participation of Non-Euro Zone Countries at the Bank Union

Studia Universitatis Babe-Bolyai Oeconomica ◽

10.1515/subboec-2017-0001 ◽

2017 ◽

Vol 62 (1) ◽

pp. 3-19

Author(s):

Liliana Donath ◽

Veronica Mihutescu Cerna

Keyword(s):

Financial Stability ◽

Decision Makers ◽

Eastern European ◽

The European Union ◽

Macroprudential Policies ◽

Catching Up ◽

Systemic Risks ◽

The Reformation ◽

Monetary Authorities ◽

Eastern European Countries

Abstract The reformation of the bank systems’ regulation and supervision in The European Union was founded on a macroprudential approach to monitor systemic risks and the vulnerabilities in a more effective way. Considered as the backbone of the new macroprudential supervision architecture, the Bank Union raises intense debates among the catching up economies. The fact that there are few studies on the costs and benefits of joining the Bank Union for the Central and Eastern European countries, explains the different views of the decision makers concerning this issue. The study stresses the manner in which macroprudential policies were implemented in Romania, as a particular case among the CEE countries, and the extent of their contribution to mitigating vulnerabilities and maintaining financial stability. The paper summarises the main arguments in favour of joining the Bank Union by emphasising the Romanian monetary authorities’ stance compared to those of the neighbouring CEE countries.

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Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework

Policy Papers ◽

10.5089/9781498339353.007 ◽

2011 ◽

Vol 11 (07) ◽

Author(s):

Keyword(s):

Financial Stability ◽

Capital Controls ◽

Policy Coordination ◽

Policy Advice ◽

Capital Inflows ◽

Policy Framework ◽

Recent Experience ◽

Macroeconomic Policies ◽

Macroprudential Policies ◽

Growth Prospects

Emerging markets (EMs) are experiencing a surge in capital inflows, lifting asset prices and growth prospects. While inflows are typically beneficial for receiving countries, inflow surges can carry macroeconomic and financial stability risks. This paper reviews the recent experience of EMs in dealing with capital inflows and suggests a possible framework for IMF policy advice on the spectrum of measures available to policymakers to manage inflows, including macroeconomic policies, prudential measures and capital controls. Illustrative applications of this framework suggest that it may be appropriate for several countries, based on their current circumstances, to consider prudential measures or capital controls in response to capital inflows. The suggested framework is intended to inform staff policy advice to all Fund members with open capital accounts. It forms part of a broader effort to sharpen Fund surveillance, preserve evenhandedness, and foster greater global policy coordination. As indicated in the Supplement to this paper, this broader effort includes the development of “global rules of the game” on macroprudential policies, capital account liberalization, and reserve adequacy, and the preparation of spillover reports assessing spillovers from the five systemic economies—all of which will inform the current and broader framework being developed.

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Macroprudential policy – closing the financial stability gap

Journal of Financial Regulation and Compliance ◽

10.1108/jfrc-03-2017-0037 ◽

2017 ◽

Vol 25 (4) ◽

pp. 334-359 ◽

Cited By ~ 5

Author(s):

Stephan Fahr ◽

John Fell

Keyword(s):

Monetary Policy ◽

Financial Stability ◽

Relative Effectiveness ◽

Policy Instruments ◽

Price Stability ◽

Macroprudential Policy ◽

Content Type ◽

Macroprudential Policies ◽

Trade Offs ◽

System Resilience

Purpose The global financial crisis demonstrated that monetary policy alone cannot ensure both price and financial stability. According to the Tinbergen (1952) rule, there was a gap in the policymakers’ toolkit for safeguarding financial stability, as the number of available policy instruments was insufficient relative to the number of policy objectives. That gap is now being closed through the creation of new macroprudential policy instruments. Both monetary policy and macroprudential policy have the capacity to influence both price and financial stability objectives. This paper develops a framework for determining how best to assign instruments to objectives. Design/methodology/approach Using a simplified New-Keynesian model, the authors examine two sets of policy trade-offs, the first concerning the relative effectiveness of monetary and macroprudential policy instruments in achieving price and financial stability objectives and the second concerning trade-offs between macroprudential policy instruments themselves. Findings This model shows that regardless of whether the objective is to enhance financial system resilience or to moderate the financial cycle, macroprudential policies are more effective than monetary policy. Likewise, monetary policy is more effective than macroprudential policy in achieving price stability. According to the Mundell (1962) principle of effective market classification, this implies that macroprudential policy instruments should be paired with financial stability objectives, and monetary policy instruments should be paired with the price stability objective. The authors also find a trade-off between the two sets of macroprudential policy instruments, which indicates that failure to moderate the financial cycle would require greater financial system resilience. Originality/value The main contribution of the paper is to establish – with the help of a model framework – the relative effectiveness of monetary and macroprudential policies in achieving price and financial stability objectives. By so doing, it provides a rationale for macroprudential policy and it shows how macroprudential policy can unburden monetary policy in leaning against the wind of financial imbalances.

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MACROPRUDENTIAL POLICIES AS BUFFER AGAINST VOLATILE CROSS-BORDER CAPITAL FLOWS

The Singapore Economic Review ◽

10.1142/s0217590815500010 ◽

2015 ◽

Vol 60 (01) ◽

pp. 1550001 ◽

Cited By ~ 8

Author(s):

AHMET FARUK AYSAN ◽

SALIH FENDOĞLU ◽

MUSTAFA KILINÇ

Keyword(s):

Interest Rate ◽

Capital Flows ◽

Financial Stability ◽

Global Financial Crisis ◽

Emerging Countries ◽

Policy Framework ◽

Working Paper ◽

Cross Border ◽

Princeton University ◽

Macroprudential Policies

This paper investigates the effectiveness of macroprudential policies introduced by Turkey in late 2010. The unprecedented quantitative easing policies of advanced countries after the global financial crisis have presented serious financial stability concerns for most emerging countries including Turkey. To cope with these challenges, Turkey has devised new policy tools such as asymmetric interest rate corridor and reserve option mechanism. From the perspective of capital flows, the interest rate corridor works mainly through stabilizing supply of foreign funds, and the reserve option mechanism through decreasing the sensitivity of equilibrium exchange rate to shifts in the demand for foreign funds. Using a large panel of 46 countries and employing [Bruno and Shin (2013a). Capital flows, cross-border banking and Global liquidity. Working paper, Princeton university; Bruno and Shin (2013b). Assessing macroprudential policies: Case of Korea. Working paper, Princeton university] methodology, we investigate whether the new policy framework in Turkey has been successful in cushioning the economy from volatile cross-border capital flows from a comparative perspective. The results show that, after controlling for a set of domestic and external variables and relative to a group of advanced and emerging countries, cross-border capital flows to Turkey have been less sensitive to global factors after the implementation of macroprudential policies.

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