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

Author/Editor:

Katharina Bergant ; Francesco Grigoli ; Niels-Jakob H Hansen ; Damiano Sandri

Publication Date:

June 26, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

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.

Series:

Working Paper No. 20/106

Subject:

English

Publication Date:

June 26, 2020

ISBN/ISSN:

9781513547763/1018-5941

Stock No:

WPIEA2020106

Format:

Paper

Pages:

41

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