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In the face of spillovers: prudential policies in emerging economies

Andra Coman and Simon Lloyd

No 2339, Working Paper Series from European Central Bank

Abstract: We examine whether emerging market prudential policies help to reduce the macrofinancial 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. Loan-to-value ratio limits and reserve requirements appear to be particularly effective prudential measures at mitigating the spillover effects of US monetary policy. 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, suggesting they may be a useful tool in the face of international macroeconomic policy trade-offs. JEL Classification: E52, E58, E61, F44

Keywords: international spillovers; local projections; monetary policy; policy interactions; prudential policy (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-ifn, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20192339

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