Are macroprudential policy instruments effective? Evidence using difference-in-difference approach with heterogeneous treatment effects

Vrinda Gupta and Amlendu Dubey

Applied Economics Letters, 2024, vol. 31, issue 18, 1791-1803

Abstract: We empirically investigate the effectiveness of 17 macroprudential policy (MPP) instruments on financial and macroeconomic stability for 98 emerging market and 36 advanced economies between 1990 and 2020. We use Difference-in-Difference estimators with heterogeneous treatment effects which are robust in estimating treatment effects as compared to time and group fixed effects estimators. We find that while in short-term MPP instruments stabilize capital & other investment flows, in longer term, the regulations may increase fluctuations. Further we find that the MPP regulation reduces leverage growth in short-term, however, it may increase leverage growth in longer term. Our results show that broadly, tightening MPP instruments has a stabilizing impact on financial variables. However, the results indicate that MPP may have negative spill-over effects on real GDP growth. The impact on real effective exchange rate depreciation is mixed.

Date: 2024
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DOI: 10.1080/13504851.2023.2206991

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