Did macroprudential policies play a role in stabilizing the credit and capital flow cycle in CESEE?

Taking up the increasingly discussed argument that strong macroprudential frameworks could be a useful cushion against external shocks (especially in the context of a fixed exchange rate regime), we study the impact of macroprudential policy intensity on credit and capital flow dynamics for a sample of EU Member States in CESEE. We introduce a novel macroprudential policy index for measuring not only the occurrence – as it is done in most of the literature – but also the strength of the implemented measures. The index reveals that several CESEE countries had already actively used macroprudential policies before the global financial crisis, with a few countries becoming more active only in the aftermath of the crisis. Over time, there have been considerable shifts in the role of different instruments. Using the intensity-adjusted index in a panel regression framework, we find that tighter macroprudential policies could be effective in containing private sector credit growth and gross capital inflows into CESEE. Finally, borrower-based macroprudential measures, such as LTV or DSTI limits, tend to have a larger and more robust impact than broader sets of macroprudential instruments.