EconPapers    
Economics at your fingertips  
 

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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0161893820300867
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Macroprudential Policy and the Probability of a Banking Crisis (2020) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:42:y:2020:i:6:p:1169-1186

DOI: 10.1016/j.jpolmod.2020.05.007

Access Statistics for this article

Journal of Policy Modeling is currently edited by A. M. Costa

More articles in Journal of Policy Modeling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2021-09-29
Handle: RePEc:eee:jpolmo:v:42:y:2020:i:6:p:1169-1186