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The macroeconomic effects of macroprudential policy

Author

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  • Björn Richter
  • Moritz Schularick
  • Ilhyock Shim

Abstract

Central banks increasingly rely on macroprudential measures to manage the financial cycle, but the effects of such policies on the core objectives of monetary policy to stabilise output and inflation are largely unknown. In this paper, we quantify the effects of changes in maximum loan-to-value (LTV) ratios on output and inflation. We rely on a narrative identification approach based on detailed reading of policymakers' objectives when implementing the measures. We find that over a four-year horizon, a 10 percentage point decrease in the maximum LTV ratio leads to a 1.1% reduction in output. As a rule of thumb, the impact of a 10 percentage point LTV tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate. However, the effects are imprecisely estimated and the effect is only present in emerging market economies. We also find that tightening LTV limits has larger economic effects than loosening them. At the same time, we show that changes in maximum LTV ratios have substantial effects on credit and house price growth. Using inverse propensity weights to re-randomise LTV actions, we show that these effects are likely causal.

Suggested Citation

  • Björn Richter & Moritz Schularick & Ilhyock Shim, 2018. "The macroeconomic effects of macroprudential policy," BIS Working Papers 740, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:740
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    References listed on IDEAS

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    Cited by:

    1. Franta, Michal & Gambacorta, Leonardo, 2020. "On the effects of macroprudential policies on Growth-at-Risk," Economics Letters, Elsevier, vol. 196(C).
    2. Jorge E. Galán, 2020. "The benefits are at the tail: uncovering the impact of macroprudential policy on growth-at-risk," Working Papers 2007, Banco de España;Working Papers Homepage.
    3. Marina Tiunova, 2019. "Commodity and Financial Cycles in Resource-based Economies," Russian Journal of Money and Finance, Bank of Russia, vol. 78(3), pages 38-70, September.
    4. Agur, Itai, 2019. "Monetary and macroprudential policy coordination among multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 192-209.
    5. Meuleman, Elien & Vander Vennet, Rudi, 2020. "Macroprudential policy and bank systemic risk," Journal of Financial Stability, Elsevier, vol. 47(C).
    6. Elien Meuleman & Rudi Vander Vennet, 2020. "Macroprudential policy, monetary policy and Eurozone bank risk," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 20/1004, Ghent University, Faculty of Economics and Business Administration.
    7. Agur, Itai, 2019. "Monetary and macroprudential policy coordination among multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 192-209.
    8. 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

    macroprudential policy; loan-to-value ratios; local projections; narrative approach;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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