Macroprudential Policies, Economic Growth, and Banking Crises

IMF Working Papers, May 22, 2020

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Using a sample that covers more than 100 countries over the 2000-2017 period, the paper assesses the impact of macroprudential policies on financial stability.
The analysis examines whether the activation of macroprudential policies is conducive to a lower incidence of systemic banking crises.
The empirical setup accounts for potential direct and indirect effects that macroprudential policies can have on banking crises.
A Generalized Impulse Response Function analysis of a dynamic system composed of the probability of a banking crisis and economic growth is used to evaluate net effects.

Macroprudential policies exert a direct stabilizing effect on financial stability.
Macroprudential policies also produce an indirect destabilizing effect by depressing economic growth.
Despite the indirect effect, the Generalized Impulse Response Function analysis reveals that macroprudential policies have a positive net effect on financial stability, manifested as a lower likelihood of systemic banking crises.

Sample: more than 100 countries.
Time period: 2000-2017.
Empirical approach: setup designed to capture direct and indirect channels from macroprudential policies to banking crises; Generalized Impulse Response Function analysis applied to a dynamic system linking crisis probability and economic growth.

Activation of macroprudential policies contributes to reducing the likelihood of systemic banking crises through a net stabilizing effect.
Policymakers should account for both direct stabilizing benefits and potential indirect growth-depressing effects when designing and timing macroprudential interventions.