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Is macroprudential policy instrument blunt?

Author

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  • Katsurako Sonoda

    (Bank of Japan)

  • Nao Sudo

    (Bank of Japan)

Abstract

Since the global financial crisis of 2008, macroprudential instruments have attracted an increasing amount of attention as potentially the best tools for stabilizing boom-and-bust cycles. This is because, in contrast to short-term interest rates, macroprudential instruments are regarded as particularly precise tools that act only on the area of concern. In this paper, we conduct an empirical examination to determine if this is the case by studying relevant areas of the Japanese economy from the 1970s to 1990s. We focus on a policy instrument called Quantitative Restriction (QR) implemented by the government. QR explicitly required banks to curb their lending to the real estate industry and related activities, and was used in the wake of the credit boom. We construct shocks to QR using narrative records of the government, and estimate their impact on the macroeconomy. We find that QR affected the aggregate economy as well as the real estate sector and land prices. In order to see why QR was a "blunt" instrument, we conduct a cross-sectional analysis using individual bank data and disaggregated industry group data. We find evidence that shocks to QR affected the aggregate economy by damaging the balance sheets of banks and non-financial firms.
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Suggested Citation

  • Katsurako Sonoda & Nao Sudo, 2015. "Is macroprudential policy instrument blunt?," Bank of Japan Working Paper Series 15-E-11, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp15e11
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    Cited by:

    1. Kim, Soyoung & Mehrotra, Aaron, 2022. "Examining macroprudential policy and its macroeconomic effects – Some new evidence," Journal of International Money and Finance, Elsevier, vol. 128(C).
    2. Soyoung Kim & Aaron Mehrotra, 2018. "Effects of Monetary and Macroprudential Policies—Evidence from Four Inflation Targeting Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(5), pages 967-992, August.
    3. Victor Pontines, 2021. "The real effects of loan-to-value limits: empirical evidence from Korea," Empirical Economics, Springer, vol. 61(3), pages 1311-1350, September.
    4. repec:zbw:bofitp:2017_004 is not listed on IDEAS
    5. Kim, Soyoung & Mehrotra, Aaron, 2017. "Managing price and financial stability objectives in inflation targeting economies in Asia and the Pacific," Journal of Financial Stability, Elsevier, vol. 29(C), pages 106-116.
    6. Soyoung Kim & Aaron Mehrotra, "undated". "Effects of monetary and macroprudential policies – evidence from inflation targeting economies in the Asia-Pacific region and potential implications for China," GRU Working Paper Series GRU_2016_025, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    7. Soyoung Kim & Aaron Mehrotra, "undated". "Effects of monetary and macroprudential policies – evidence from inflation targeting economies in the Asia-Pacific region and potential implications for China," GRU Working Paper Series GRU_2016_025, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    8. Stefan Angrick & Naoyuki Yoshino, 2020. "From Window Guidance to Interbank Rates: Tracing the Transition of Monetary Policy in Japan and China," International Journal of Central Banking, International Journal of Central Banking, vol. 16(3), pages 279-316, June.
    9. Kim, Jihae & Kim, Soyoung & Mehrotra, Aaron, 2019. "Macroprudential policy in Asia," Journal of Asian Economics, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    Short-term interest rates; Macroprudential instrument; Boom-and-Bust Cycle;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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