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

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

Author

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  • Katharina Bergant
  • Kristin Forbes
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.

Suggested Citation

  • Katharina Bergant & Kristin Forbes, 2023. "Macroprudential Policy during COVID-19: The Role of Policy Space," World Scientific Book Chapters, in: Claudio Borio & Edward S Robinson & Hyun Song Shin (ed.), MACRO-FINANCIAL STABILITY POLICY IN A GLOBALISED WORLD: LESSONS FROM INTERNATIONAL EXPERIENCE Selected Papers from the Asian Monetary Policy Forum 202, chapter 8, pages 130-174, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811259432_0008
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    Cited by:

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    3. Bergant, Katharina & Forbes, Kristin, 2023. "Policy packages and policy space: Lessons from COVID-19☆," European Economic Review, Elsevier, vol. 158(C).

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    More about this item

    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;
    All these keywords.

    JEL classification:

    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F - International Economics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F01 - International Economics - - General - - - Global Outlook
    • F3 - International Economics - - International Finance
    • E - Macroeconomics and Monetary Economics

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