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Macroprudential policy and the probability of a banking crisis

Ryota Nakatani

Journal of Policy Modeling, 2020, vol. 42, issue 6, 1169-1186

Abstract: The ultimate purpose of macroprudential policy is to avoid financial instability, such as banking crises, which have a long-lasting and devastating effect on the economy. Although a growing number of studies have examined the effects of macroprudential policy on credit growth, few empirical studies have analyzed its effect on the probability of a banking crisis. Does macroprudential policy actually affect the probability of a banking crisis? Do other macroeconomic policies matter for the effectiveness of macroprudential policy? To answer these questions, this paper empirically investigates the effect of macroprudential policy on the probability of a banking crisis and its relationship with other macroeconomic policies. Specifically, using data on 65 countries from 2000 to 2016, we employ a probit model to analyze the effect of changes in the loan-to-value (LTV) ratio on crisis probability. Our results show that macroprudential policy is effective in changing the probability of a banking crisis via a credit channel and that its effectiveness depends on other macroeconomic policies. Changes in the LTV ratio are found to be effective in influencing the probability of a banking crisis in countries that have inflation targeting frameworks, floating exchange rate regimes, and/or no capital controls. Our results underscore the importance of policy coordination among different government bodies to design an appropriate macroprudential policy, especially in the current context of the Covid-19 crisis.

Keywords: Macroprudential policy; Loan-to-value (LTV) ratio; Banking crisis; Exchange rate regime; Capital control (search for similar items in EconPapers)
JEL-codes: E52 E61 F33 F38 G01 G28 R31 R38 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jpolmod.2020.05.007

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