In the face of spillovers: prudential policies in emerging economies

We examine whether emerging market prudential policies offset the macro-financial spillover effects of US monetary policy. We find that emerging markets with tighter overall prudential policy face significantly smaller, and less negative, spillovers to total credit from US monetary policy tightening shocks. Loan-to-value ratio limits and reserve requirements appear to be particularly effective prudential tools at mitigating the spillover effects of US monetary policy. Our findings indicate that prudential policies can dampen emerging markets’ exposure to US monetary policy and the associated global financial cycle, suggesting they may be a useful tool in the face of international macroeconomic policy trade-offs.