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Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)?

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  • Katharina Bergant
  • Mr. Francesco Grigoli
  • Mr. Niels-Jakob H Hansen
  • Mr. Damiano Sandri

Abstract

We show that macroprudential regulation can considerably dampen the impact of global financial shocks on emerging markets. More specifically, a tighter level of regulation reduces the sensitivity of GDP growth to VIX movements and capital flow shocks. A broad set of macroprudential tools contribute to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky forms of credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. These findings on the benefits of macroprudential regulation are particularly notable since we do not find evidence that stricter capital controls provide similar gains.

Suggested Citation

  • Katharina Bergant & Mr. Francesco Grigoli & Mr. Niels-Jakob H Hansen & Mr. Damiano Sandri, 2020. "Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)?," IMF Working Papers 2020/106, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2020/106
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    Keywords

    WP; capital control; real GDP; net capital; output gap; ln VIX; trend GDP; GDP growth; monetary policy shock; policy rate; Capital controls; Central bank policy rate; Emerging and frontier financial markets; Capital outflows; Capital flows; Global; Macroprudential policies; monetary policy; net outflow; dampening effect; monetary policy response;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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