Macroprudential Policy during COVID-19: The Role of Policy Space

Katharina Bergant and Kristin Forbes

Chapter 8 in Macro-financial Stability Policy in a Globalised World: Lessons from International Experience:Selected Papers from the Asian Monetary Policy Forum 2021 Special Edition and MAS-BIS Conference, 2023, pp 130-174 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter uses the initial phase of the COVID-19 pandemic to examine how macroprudential frameworks developed over the past decade performed during a period of heightened financial and economic stress. It discusses a new measure of the macroprudential stance that better captures the intensity of different policies across countries and time. Then it shows that macroprudential policy has been used countercyclically — with stances tightened during the 2010s and eased in response to COVID-19 by more than previous risk-off periods. Countries that tightened macroprudential policy more aggressively before COVID-19, as well as those that eased more during the pandemic, experienced less financial and economic stress. The ability of countries to use macroprudential policy, however, was significantly constrained by the extent of existing “policy space”, i.e., by how aggressively policy was tightened before COVID-19. The use of macroprudential tools was not significantly affected by the space available to use other policy tools (such as fiscal policy, monetary policy, FX intervention and capital flow management measures), and the use of other tools was not significantly affected by the space available to use macroprudential policy. This suggests that although macroprudential tools are being used countercyclically and should therefore help stabilise economies and financial markets, there appears to be an opportunity to better integrate the use of macroprudential tools with other policies in the future.

Keywords: Macro-financial Policy; Policy Framework; Macroprudential Policy; Monetary Policy; Fiscal Policy; Capital Flow Management Measure; Capital Control; Foreign Exchange Intervention; Integrated Policies; Multiple Policies; Policy Trade-off; Policy Substitute; Policy Complement; Policy Interaction; Policy Space; Central Bank; International Spillovers; Spillbacks; Sending Country; Receiving Country; Financial Channel; Financial Regulation; Financial Stability; External Stability; Advanced Economy; Emerging Market Economy; Capital Flow; Portfolio Flow; Banking Flow; Exchange Rate; Banking System; Non-bank Financial Institution; United Kingdom; Sweden; China; Hong Kong Sar; India; Indonesia; Korea; Singapore; Latin America; Croatia (search for similar items in EconPapers)
JEL-codes: E E52 E58 E6 F F01 F3 F38 (search for similar items in EconPapers)
Date: 2023
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Related works:
Working Paper: Macroprudential Policy during COVID-19: The Role of Policy Space (2021)
Working Paper: Macroprudential Policy during COVID-19: The Role of Policy Space (2021)
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