Macroprudential and Monetary Policies: The Need to Dance the Tango in Harmony
The Great Recession during the late 2000s and early 2010s has led to a strengthening of macroprudential policies over the world in order to address systemic risk concerns. However, the effectiveness of those measures remains unclear. The existing literature fails to demonstrate clearly that macroprudential policies address effectively financial vulnerabilities. Moreover, the impact of these policies is often assessed regardless of the monetary policy stance, which is another main determinant of financial stability. This empirical paper aims to fill this gap by at least two ways. Based on a sample of 37 countries covering the period from 2000Q1 to 2014Q4, we first propose to re-evaluate the effectiveness of the macroprudential policies to limit excessive credit growth by considering different measures accounting for the macroprudential policy stance. Second, we also test whether the impact of prudential policies is strengthened by the monetary policy stance, measured through the Taylor gap. Our results indicate that changes in macroprudential policies effectively reduce the credit growth, but there is a transmission delay approximately of one year to be effective. Interestingly, this delay fell to one quarter when macroprudential and monetary policies move in the same direction simultaneously which is a new finding.
Jose David Garcia Revelo, Yannick Lucotte, and Florian Pradines-Jobet