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In the face of spillovers: Prudential policies in emerging economies

Andra Coman and Simon Lloyd

Journal of International Money and Finance, 2022, vol. 122, issue C

Abstract: We examine whether emerging market prudential policies help to reduce the macro-financial spillover effects of US monetary policy. We find that emerging markets with tighter prudential policies face significantly smaller, and less negative, spillovers to total credit from US monetary policy tightening shocks. Reserve requirements and, to a lesser extent, loan-to-value ratio limits appear to be particularly effective prudential measures at mitigating the spillover effects of US monetary policy. Consistent with the bank-lending channel, our findings indicate that domestic prudential policies can dampen emerging markets’ exposure to US monetary policy and the associated global financial cycle, even when accounting for capital controls. These findings suggest they may be a useful tool in the face of international macroeconomic policy trade-offs.

Keywords: International spillovers; Local projections; Policy interactions; Monetary policy; Prudential policy (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 F44 (search for similar items in EconPapers)
Date: 2022
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Working Paper: In the face of spillovers: prudential policies in emerging economies (2019) Downloads
Working Paper: In the face of spillovers: prudential policies in emerging economies (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:122:y:2022:i:c:s0261560621002059

DOI: 10.1016/j.jimonfin.2021.102554

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