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Financial Openness, Bank Capital Flows, and the Effectiveness of Macroprudential Policies

Author

Listed:
  • Hao Jin

    (Xiamen University)

  • Chen Xiong

    (Xiamen University)

Abstract

This paper quantitatively examines the effects of macroprudential policies on credit growth in open economies. We develop a small open economy DSGE model where banks choose their funding sources (domestic vs. foreign deposits) and subject to financial constraints. Our model predicts that banks reduce leverage in response to a macroprudential policy tightening, but they increasingly rely on foreign funding. This endogenous liability composition shifts significantly undermine the stabilizing effect and welfare gains of macroprudential policies. Our results suggest macroprudential policies are less effective and should be set more aggressive in financially more open economies. Finally, we find empirical support for the model predictions in a group of developing and emerging economies.

Suggested Citation

  • Hao Jin & Chen Xiong, 2019. "Financial Openness, Bank Capital Flows, and the Effectiveness of Macroprudential Policies," Working Papers 2019-07-08, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    • Handle: RePEc:wyi:wpaper:002465
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    Cited by:

    1. is not listed on IDEAS
    2. Yang Zhou & Shigeto Kitano, 2025. "Capital Controls or Macroprudential Policies: Which is Better for Land Booms and Busts?," Open Economies Review, Springer, vol. 36(3), pages 835-871, July.

    More about this item

    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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