Effectiveness of macroprudential policies in Central and Eastern European countries

Study

Sample

Period

Research questions

Main findings

Lim et al. (2011)

49 countries actively using macroprudential instruments

2000–10

Effectiveness of macroprudential instruments in achieving their objectives.

Factors affecting the choice of instruments.

Circumstances in which instruments are used.

Many instruments can effectively reduce systemic risk in the financial sector.

Their effectiveness does not necessarily depend on the stage of economic development or the type of exchange rate regime.

Emerging markets with fixed exchange rate regimes or managed floats use macroprudential measures more often.

Emerging markets facing large capital inflows, with shallow financial markets, and those with bank-centric systems also use macroprudential tools more often.

Macroprudential instruments can be just as effective when used in advanced economies with flexible exchange rate regimes.

Quereshi et al. (2011)

51 EMEs

1995–2008

Can macroprudential policy and capital controls help enhance financial stability in periods of large foreign capital inflows?

Construct new indices for macroprudential measures dealing with currency risk and capital controls for the financial sector.

Macroprudential policy and capital controls reduce the riskiness of external borrowing and domestic foreign currency lending.

Policies that do not discriminate on the basis of currency or residency can also be effective in mitigating excessive credit growth.

Schou-Zibell, Albert and Song (2012)

41 EMEs in Asia, Latin America and Europe, plus 18 advanced economies

1993–2008

Identify most important determinants of financial soundness and stability capital adequacy, asset quality, earnings, profitability) in EMEs.

The relationship between financial soundness indicators and macroeconomic indicators varies depending on the stage of economic and financial development.

Tovar, Garcia-Escribano and Martin (2012)

Five Latin American economies

January 2003 – April 2011

Effectiveness of reserve requirement in reducing credit growth.

Construct a composite indicator of reserve requirements used in different countries.

Study how credit to the private sector, market and policy interest rates, and exchange rates  react to changes in average reserve requirements, marginal reserve requirements and other macroprudential instruments.

Reserve requirements and other macroprudential instruments led to a slowdown in growth of bank credit to the private sector.

Panel data VAR including a binary macroprudential policy variable, industrial production and private credit growth also suggests that macroprudential tools limit credit growth. 

Vandenbussche, Vogel and Detragiache (2012)

16 countries in Central, Eastern and Southeastern Europe

Early 2000s – 2011 Q1

On a panel of 16 countries, the authors explore the impact of macroprudential policy measures on housing price inflation.

Tightening of minimum capital adequacy requirements and nonconventional measures used to guarantee liquidity, such as marginal reserve requirements on foreign funding sources and excessive credit growth, contributed to a slowdown in housing prices.

Nier et al. (2012)

15 developed economies and 21 emerging market economies

How macroprudential measures affect credit activity, house prices, economic activity and capital inflows.

How these effects depend on the stages of economic cycle.

Capital requirements and reserve requirements contribute to a slowdown in credit growth.

Loan-to-value and debt-to-income ratios effective in EMEs.

Medas et al. (2013)

25 economies

2000–11

Effectiveness of loan-to-value and debt-to income ratios; greater risk weights; and higher provisioning requirements in restraining credit growth and real estate prices.

Construct variables that reflect the intensity of use of individual macroprudential measures as these are tightened or loosened.

Greater risk weights and higher loan-to-value and debt-to income ratios are successful in dampening growth of credit and real estate prices.

Cerutti, Claessens and Laeven (2015)

119 countries

2000-13

Relationship between the use of macroprudential policies and developments in credit and housing markets.

Effectiveness of macroprudential policies in dampening financial cycles.

Emerging countries use macroprudential policies more often, especially FX related measures, while advanced countries primarily rely on borrower-based measures.

These policies generally result with lower credit growth, primarily for households.

Macroprudential policies can help manage financial cycles, but they work better in the boom than in the bust phase.