The Interaction Between Macroprudential Policy and Financial Stability

In this paper, an index of domestic macroprudential policy tools is constructed and the effectiveness of these tools in controlling credit growth is studied using a dynamic panel data model for the period between 2000 and 2017. The empirical analysis includes two panels namely an EU panel of 27 countries and a Latin American panel of 7 countries, and the paper also looks at a case study of Chile, Colombia, Japan, Portugal and the UK. Our main results find that the cumulative index of macroprudential policy tools does not have a statistically significant impact on credit growth when considering a panel of 27 EU countries. When considering the case of Japan, a tighter capital conservation buffer leads to a decrease in the credit supply. When looking at a panel of 7 Latin American countries, our main results show that a tightening of the capital conservation buffer results in an increase in the credit supply. A tightening of the loan-to-value ratio results in a decrease in the credit supply in the panel of 7 Latin American countries. Lastly, a tightening in the overall macroprudential policy tool stance results in a decrease in credit supply in Japan and an increase in credit supply in Portugal.