What motives and conditions drive countries to adopt macroprudential and capital management measures?
Nieminen, Mika; Norring, Anni (11.04.2025)
Numero
3/2025Julkaisija
Bank of Finland
2025
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2025041125944Tiivistelmä
Countries choose diverse policy mixes of macroprudential and capital flow management measures, yet the drivers behind these policy choices remain largely unexplored. We identify potential conditions for the adoption and determinants of the use of macroprudential and capital flow management measures from the theoretical literature and test them empirically. Rich and high-growth economies tend to rely on macroprudential policy measures, while the use of capital flow management measures decreases as the regulatory environment improves. Countries with a large foreign bank presence tend to implement fewer macroprudential and capital flow management measures.
Julkaisuhuomautus
NON-TECHNICAL SUMMARY
FOCUS
The standard policy recipe for ensuring internal and external economic stability is often described as allowing external macroeconomic adjustment via flexible exchange rates and an open capital account, while reserving monetary policy for steering the domestic economic conditions. When this standard recipe is insufficient in shielding the economy from financial turmoil, policymakers resort to additional tools, such as macroprudential policy and capital flow management measures. Countries choose quite diverse policy mixes, yet the drivers of these choices remain largely unexplored. In this paper, we examine the motives and conditions facing policymakers in decisions on macroprudential policy and capital flow management measures.
CONTRIBUTION
To identify potential conditions for the adoption and determinants of the use of macroprudential and capital flow management measures, we first consider theoretical contributions on the optimal use of these policy tools. This discussion is followed by a systematic empirical evaluation of their relative importance in large sample of countries. We ask whether the determinants and their relative importance change depending on whether the country considered is an advanced economy, a major emerging economy or falls into the category of “other emerging and developing economies”. The paper finishes with an assessment of whether macroprudential and capital flow management measures are complements, substitutes, both, or neither.
FINDINGS
We find that rich and high-growth economies tend to rely more heavily on macroprudential policy measures. Good institutions and robust regulatory regimes are associated with lower reliance on capital flow management and greater use of macroprudential policy. Countries with a large foreign bank presence are generally more reluctant to implement macroprudential and capital flow management measures. High economic growth and frequent currency crises cause major emerging economies to rely more heavily on macroprudential policy measures than advanced economies. Good institutional quality seems to be the reason major emerging economies rely on macroprudential policy more than other emerging and developing economies. The greater use of capital flow management measures by major emerging economies compared to advanced economies likely reflects lower institutional quality. Finally, there is no clear correlation between the use of these policy measures.
FOCUS
The standard policy recipe for ensuring internal and external economic stability is often described as allowing external macroeconomic adjustment via flexible exchange rates and an open capital account, while reserving monetary policy for steering the domestic economic conditions. When this standard recipe is insufficient in shielding the economy from financial turmoil, policymakers resort to additional tools, such as macroprudential policy and capital flow management measures. Countries choose quite diverse policy mixes, yet the drivers of these choices remain largely unexplored. In this paper, we examine the motives and conditions facing policymakers in decisions on macroprudential policy and capital flow management measures.
CONTRIBUTION
To identify potential conditions for the adoption and determinants of the use of macroprudential and capital flow management measures, we first consider theoretical contributions on the optimal use of these policy tools. This discussion is followed by a systematic empirical evaluation of their relative importance in large sample of countries. We ask whether the determinants and their relative importance change depending on whether the country considered is an advanced economy, a major emerging economy or falls into the category of “other emerging and developing economies”. The paper finishes with an assessment of whether macroprudential and capital flow management measures are complements, substitutes, both, or neither.
FINDINGS
We find that rich and high-growth economies tend to rely more heavily on macroprudential policy measures. Good institutions and robust regulatory regimes are associated with lower reliance on capital flow management and greater use of macroprudential policy. Countries with a large foreign bank presence are generally more reluctant to implement macroprudential and capital flow management measures. High economic growth and frequent currency crises cause major emerging economies to rely more heavily on macroprudential policy measures than advanced economies. Good institutional quality seems to be the reason major emerging economies rely on macroprudential policy more than other emerging and developing economies. The greater use of capital flow management measures by major emerging economies compared to advanced economies likely reflects lower institutional quality. Finally, there is no clear correlation between the use of these policy measures.