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Title: Spillovers at the Extremes: The Macroprudential Stance and Vulnerability to the Global Financial Cycle

Author(s): Anusha Chari, Karlye Dilts Stedman and Kristin Forbes

Publication Date: January 2022

Keyword(s): Global financial cycle, macroprudential policy, Risk-off, risk-on and Sudden stops

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: The effects of macroprudential policy on portfolio flows vary considerably across the global financial cycle. A tighter ex-ante macroprudential stance amplifies the impact of global risk shocks on bond and equity flows, increasing outflows significantly more during risk-off episodes and increasing inflows significantly more during risk-on episodes. These amplification effects are more prominent at the "extremes," especially for extreme risk-off periods and for regulations that target specific risks instead of generalized cyclical buffers. This paper estimates these relationships using a policy-shocks approach that corrects for reverse causality by combining high-frequency risk measures with weekly data on portfolio investment and a new measure of macroprudential regulations that captures the intensity of policy stances. Overall, the results support a growing body of evidence that macroprudential regulation can reduce the volume and volatility of bank flows but shift risks in ways that aggravate vulnerabilities in other parts of the financial system.

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Bibliographic Reference

Chari, A, Dilts Stedman, K and Forbes, K. 2022. 'Spillovers at the Extremes: The Macroprudential Stance and Vulnerability to the Global Financial Cycle'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16889