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Spillovers at the Extremes: The Macroprudential Stance and Vulnerability to the Global Financial Cycle

Author

Listed:
  • Anusha Chari
  • Karlye Dilts Stedman
  • Kristin Forbes

Abstract

The effects of macroprudential policy on portfolio flows vary considerably across the global financial cycle. A tighter ex-ante macroprudential stance amplifies the impact of global risk shocks on bond and equity flows, increasing outflows significantly more during risk-off episodes and increasing inflows significantly more during risk-on episodes. These amplification effects are more prominent at the “extremes,” especially for extreme risk-off periods and for regulations that target specific risks instead of generalized cyclical buffers. This paper estimates these relationships using a policy-shocks approach that corrects for reverse causality by combining high-frequency risk measures with weekly data on portfolio investment and a new measure of macroprudential regulations that captures the intensity of policy stances. Overall, the results support a growing body of evidence that macroprudential regulation can reduce the volume and volatility of bank flows but shift risks in ways that aggravate vulnerabilities in other parts of the financial system.

Suggested Citation

  • Anusha Chari & Karlye Dilts Stedman & Kristin Forbes, 2022. "Spillovers at the Extremes: The Macroprudential Stance and Vulnerability to the Global Financial Cycle," NBER Working Papers 29670, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29670
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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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