DP14948 Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)?

Author(s): Katharina Bergant, Francesco Grigoli, Niels-Jakob Hansen, Damiano Sandri
Publication Date: June 2020
Keyword(s): capital controls, macroprudential policies, monetary policy
JEL(s): E5, F3, F4
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14948

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.