Financial development and the effectiveness of macroprudential and capital flow management measures

Using quarterly data on macroprudential policy (MaPP) measures and capital flow management measures (CFMs) taken by 39 economies in 2000–2013, we analyse how domestic credit and cross-border capital flows respond to such measures. In doing so, we take a granular approach by considering price-based and quantity-based MaPP measures and CFMs, and also examine if the level of financial development matters in explaining policy effectiveness. We find that quantity-based MaPP measures significantly affect total credit and its components such as domestic bank credit, corporate credit and housing credit, but that the effects fade away beyond a certain level of financial development, suggesting that highly developed financial markets provide opportunities to circumvent MaPP measures imposed on banks. We also find that both price- and quantity-based CFMs are effective in slowing down bank inflows with the former effective at all levels of financial development and the latter effective at relatively high levels. Finally, we find some evidence on the existence of leakage effects. For example, tighter overall MaPP measures are associated with larger bond inflows, and tighter quantity-based MaPP measures with larger bank inflows.