AI Summary & Key Takeaways
AI InsightWe argue that the insufficient number of MPP implementations is unable to prevent leakages in the system and reduce the effectiveness of MPPs under a global liquidity shock.
📌 3 Key Takeaways
Abstract
Macroprudential policies (MPPs) were relatively less used around the world before the 2008 global financial crisis (GFC). In the aftermath of the GFC, they have become popular both in advanced and emerging market countries. Through time, the accumu- lation of new data across countries has led to a growing body of literature investigating the effectiveness of such policies. In this paper, using a data set of 30 developing and emerging market countries and panel VAR approach with GMM estimation, we con- tribute to this literature, first, by testing whether MPPs are effective in controlling domestic credit growth after a global liquidity shock. Second, we test whether MPPs are more effective when a combination of MPPs are used to control credit growth. Re- sults indicate that MPPs are effective tools to limit domestic credit growth, especially during the expansion phase of the credit cycle. Second, the number of MPP tools does matter to manage the magnitude and duration of the domestic credit growth effec- tively. We argue that the insufficient number of MPP implementations is unable to prevent leakages in the system and reduce the effectiveness of MPPs under a global liquidity shock.