Evaluating the Effectiveness of Macroprudential Policy Across Macro-Financial Cycles

This paper investigates the effectiveness of macroprudential policy across different phases of macro-financial cycles. Utilizing a panel threshold vector autoregression (PT-VAR) model, the study evaluates the asymmetric impacts of capital-based and borrower-based regulatory tools under varying conditions. The empirical analysis covers 43 countries from 2004 to 2023 and incorporates key macro-financial indicators such as real GDP, policy interest rates, credit-to-GDP ratio, house prices, inflation, and exchange rates. The results can be summarized in three key findings. First, the effects of macroprudential tightening differ substantially between below- and above-threshold regimes, underscoring the importance of the phase of the macro-financial cycles. Second, capital-based measures are particularly effective during below-threshold phases, curbing credit growth, house prices, and inflation, though they are associated with a relatively significant decline in real GDP growth. Third, borrower-based measures are most effective during above-threshold phases of the business cycle, where they help to contain house prices and inflation pressures, while having only muted effects on real GDP growth. These findings emphasize the critical role of timing and instrument choice in macroprudential policy design and contribute to the growing literature by providing robust evidence on the cyclical nature of policy effectiveness, offering important insights for regulatory strategy.