IMF Working Papers

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

By Katharina Bergant, Francesco Grigoli, Niels-Jakob H Hansen, Damiano Sandri

June 26, 2020

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Katharina Bergant, Francesco Grigoli, Niels-Jakob H Hansen, and Damiano Sandri. Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)?, (USA: International Monetary Fund, 2020) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Balance of payments, Capital controls, Capital flows, Capital outflows, Central bank policy rate, Emerging and frontier financial markets, Financial markets, Financial services

Keywords: Capital control, Capital controls, Capital flows, Capital outflows, Central bank policy rate, Dampening effect, Emerging and frontier financial markets, GDP growth, Global, Ln VIX, Macroprudential policies, Monetary policy, Monetary policy response, Monetary policy shock, Net capital, Net outflow, Output gap, Policy rate, Real GDP, Trend GDP, WP

Publication Details

  • Pages:

    41

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2020/106

  • Stock No:

    WPIEA2020106

  • ISBN:

    9781513547763

  • ISSN:

    1018-5941

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