Credit Cycles and Capital Flows: Effectiveness of the Macroprudential Policy Framework in Emerging Market Economies

Credit Cycles and Capital Flows: Effectiveness of the Macroprudential Policy Framework in Emerging Market Economies

17/13

May 2017

I assess the effectiveness of macroprudential policy tools in containing credit cycles per se or the impact of portfolio inflows on the cycles in major emerging market economies. The results show that borrower-based tools, measures with a domestic focus, and domestic reserve requirements are particularly effective. The findings are, in most cases, stronger for the recent period during which most of the macroprudential actions are undertaken, and generally hold for alternative definitions of credit cycle, the monetary policy stance, and portfolio inflows. Moreover, the analyses focusing on the recent period and the regional analyses suggest that foreign-currency based measures are effective. Still, these measures being implemented in a few countries or only recently makes it harder to draw general conclusions. Lastly, financial-institutions-based measures are found to be effective for the Emerging Europe which has resorted to these policies relatively frequently. This result hints at the importance of building up experience in implementing macroprudential measures.