The paradox of macroprudential policy and sovereign risk

Antonio Afonso and André Teixeira

Journal of Financial Stability, 2025, vol. 78, issue C

Abstract: This paper investigates the impact of macroprudential policy on sovereign risk. As long as macroprudential policy improves financial stability, it lowers sovereign risk and enables governments to increase spending without raising taxes. Consequently, countries with tighter macroprudential policies have lower primary budget balances and accumulate government debt over time. However, this effect diminishes or reverses when there is excessive regulation or high levels of debt. These findings are somewhat paradoxical: macroprudential policy may lower private debt, while increasing public debt.

Keywords: Bank regulation; Fiscal policy; Government spending; Macroprudential policy; Sovereign risk (search for similar items in EconPapers)
JEL-codes: E52 E58 E62 G28 H3 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:78:y:2025:i:c:s1572308925000403

DOI: 10.1016/j.jfs.2025.101411

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