Governance arrangements and the use of macroprudential policy

We analyse how the institutional arrangement for macroprudential policy, in particular the central bank’s role, affects the use of macroprudential policy. To this aim, we use a survey of central banks regarding their financial stability policy arrangements and a panel dataset including 31 economies. By estimating structural panel vector autoregressions and local projections, we find that a greater role for the central bank in macroprudential policy decisions tends to be associated with a more contractionary response of macroprudential policy to credit shocks. These results are robust to controlling for the potential endogeneity of the governance arrangement. We note the important role of powers assigned to the macroprudential authority but document that the results are not driven by the degree of central bank independence. While interest rates also rise in response to credit shocks, we find smaller differences in the interest rate response between economies. In addition, we document that even in the cases where macroprudential policy tightens in response to credit shocks, macroprudential policy measures tend to be undertaken only infrequently.