Effectiveness of Macroprudential Policy: Problems of Measurement and Evaluation

The macroprudential policy of central banks plays a key role in ensuring financial stability not only at the level of individual states but also on the scale of the entire global economy. In this regard, adequate measurement of its effectiveness is an urgent task for national and supranational financial regulatory authorities. The present study is focused on solving this problem. The purpose of the study is to develop indicators and criteria for a comprehensive assessment of the effectiveness of countries’ macroprudential policies, allowing for a cross-country analysis of this effectiveness and identifying the best global practices in macroprudential regulation. The study is based on the consolidation of the market and institutional approaches to measuring financial stability, as well as on the use of normative methods and methods of comparative economic analysis. As a result of the study, new indicators for diagnosing the effectiveness of macroprudential policy have been developed. Criteria are proposed to determine the international positions of countries in terms of the level of general, market, and institutional effectiveness of the macroprudential policy. Testing of the developed indicators and criteria was carried out for 180 countries for the period 1998–2019. The developed indicators and criteria for the effectiveness of macroprudential policy differ from the existing ones in a comprehensive manner, since they take into account the stability of financial markets and financial systems at the same time. They are also more representative as they include a wider range of parameters taken into account in financial stability calculations.

1. Tang Zh., Zhang T., Liu Ch., Wu J. A scientometric review on literature of macroprudential policy. Economic Research — Ekonomska Istraživanja. 2021;34(1):1498–1519. DOI: 10.1080/1331677X.2020.1844579

2. Ehigiamusoe K. U., Lean H. H., Chan J. H. Influence of macroeconomic stability on financial development in developing economies: Evidence from West African region. The Singapore Economic Review. 2020;65(4):837–856. DOI: 10.1142/S 0217590819500553

3. Zulkhibri M. Macroprudential policy and tools in a dual banking system: Insights from the literature. Borsa Istanbul Review. 2019;19(1):65–76. DOI: 10.1016/j.bir.2018.04.001

4. Al-Rjoub S. A financial stability index for Jordan. Journal of Central Banking Theory and Practice. 2021;10(2):157–178. DOI: 10.2478/jcbtp‑2021–0018

5. Gospodarchuk G., Suchkova E. Financial stability: Problems of inter-level and cross-sectoral equilibrium. Equilibrium: Quarterly Journal of Economics and Economic Policy. 2019;14(1):53–79. DOI: 10.24136/EQ.2019.003

6. Hodbod A., Huber S. J., Vasilev K. Sectoral risk-weights and macroprudential policy. Journal of Banking & Finance. 2020;112:105336. DOI: 10.1016/j.jbankfin.2018.04.015

7. Mankart J., Michaelides A., Pagratis S. Bank capital buffers in a dynamic model. Financial Management. 2020;49(2):473–502. DOI: 10.1111/fima.12253

8. Noreen U., Alamdar F., Tariq T. Capital buffers and bank risk: Empirical study of adjustment of Pakistani banks. International Journal of Economics and Financial Issues. 2016;6(4):1798–1806. URL: https://www.researchgate.net/ publication/309671377_Capital_Buffers_and_Bank_Risk_Empirical_Study_of_Adjustment_of_Pakistani_Banks

9. Danarsari D. N., Viverita, Rokhim R. Capital buffer for stronger bank stability: Empirical evidence from Indonesia’s commercial banks. Pertanika Journal of Social Sciences and Humanities. 2018;26(S):55–68. URL: http://www.pertanika.upm.edu.my/resources/files/Pertanika%20PAPERS/JSSH%20Vol.%2026%20(S)%20Aug.%202018/5%20JSSH(S)-0690–2018.pdf

10. Gornall W., Strebulaev I. A. Financing as a supply chain: The capital structure of banks and borrowers. Journal of Financial Economics. 2018;129(3):510–530. DOI: 10.1016/j.jfineco.2018.05.008

11. Oduor J., Ngoka K., Odongo M. Capital requirement, bank competition and stability in Africa. Review of Development Finance. 2017;7(1):45–51. DOI: 10.1016/j.rdf.2017.01.002

12. Avgouleas E. Bank leverage ratios and financial stability: A micro- and macroprudential perspective. Levy Economics Institute of Bard College. Working Paper. 2015;(849). URL: https://www.levyinstitute.org/pubs/wp_849.pdf

13. Haldane A. G., Madouros V. The dog and the frisbee. Revista de Economía Institucional. 2012;14(27):13–56. URL: https://revistas.uexternado.edu.co/index.php/ecoins/article/view/3277/2927 (In Spanish).

14. Cociuba S. E., Shukayev M., Ueberfeldt A. Managing risk taking with interest rate policy and macroprudential regulations. Economic Inquiry. 2019;57(2):10561081. DOI: 10.1111/ecin.12754

15. Gross M., Henry J., Semmler W. Destabilizing effects of bank overleveraging on real activity — an analysis based on a threshold MCS-GVAR. Macroeconomic Dynamics. 2018;22(7):1750–1768. DOI: 10.1017/S 1365100516001024

16. Wang W., Huang S. Risk sharing and fi nancial stability: A welfare analysis. Journal of Economic Interaction and Coordination. 2021;16(1):211–228. DOI: 10.1007/s11403–020–00291–5

17. Freixas X., Perez-Reyna D. Optimal macroprudential policy and rational bubbles. Journal of Financial Intermediation. 2021;46:100908. DOI: 10.1016/J.JFI.2021.100908

18. Mehrotra A., Moessner R. Macroprudential policy and interest rate spillovers. Applied Economics Letters. 2023;30(1):61–65. DOI: 10.1080/13504851.2021.1975025

19. Herring R. J. Less really can be more: Why simplicity and comparability should be regulatory objectives. Atlantic Economic Journal. 2016;44(1):33–50. DOI: 10.1007/s11293–016–9488–4

20. Pfeifer L., Holub L., Pikhart Z., Hodula M. Leverage ratio and its impact on the resilience of the banking sector and effi ciency of macroprudential policy fi nance. Czech Journal of Economics and Finance. 2017;67(4):277–299. URL: https://journal.fsv.cuni.cz/storage/1388_277-299_pfeifer_final_issue_04_2017.pdf

21. Admati A. The missed opportunity and challenge of capital regulation. National Institute Economic Review. 2016;235(1):4–14. DOI: 10.1177/002795011623500110

22. Juhro S. M., Prabheesh K. P., Lubis A. The effectiveness of trilemma policy choice in the presence of macroprudential policies: Evidence from emerging economies. The Singapore Economic Review. 2021. DOI: 10.1142/S 0217590821410058

23. Donath L., Cerna V., Oprea I. The monetary macroprudential policy stance in safeguarding fi nancial stability. The case of Romania. Procedia Economics and Finance. 2015;32:111–118. DOI: 10.1016/S 2212–5671(15)01371–4

24. Chen M., Kang Q., Wu L., Jeon B. N. Do macroprudential policies affect bank effi ciency? Evidence from emerging economies. Journal of International Financial Markets, Institutions and Money. 2022;77:101529. DOI: 10.1016/j.intfi n.2022.101529

25. Kreptsev D., Porshakov A., Seleznev S., Sinyakov A. The equilibrium interest rate: A measurement for Russia. Bank of Russia Economic Research Working Papers. 2016;(13). URL: http://www.cbr.ru/content/document/file/87567/wps_13_e.pdf