Macroprudential Policy, Credit Booms, and Banks' Systemic Risk

Recent financial crises have highlighted once again the importance of credit booms as a key determinant of financial instability in both advanced and developing countries. In this study, I examine whether macroprudential policies are effective to address booms in different types of credit. The robust and economically sizeable results show that macroprudential instruments are effective to curb aggregate bank credit booms, and more importantly booms in household credit that pose a larger concern for financial stability. This paper also contributes to the understanding of the mechanisms linking macroprudential policies with credit booms followed by systemic banking crises. I find that a possible mechanism for why macroprudential policies are effective to curb booms succeeded by banking crises could be that these policies reduce financial institutions' exposure to systemic risk.