The Effectiveness of Macroprudential Policy

Jorge A Chan-Lau

Systemic risk regulation is mainly enforced through macroprudential policy and its corresponding tools. Evaluation of the effectiveness of macroprudential policy requires enquiring whether three broad objectives consistent with reducing risks and vulnerabilities in the time and cross-dimensions are met. First, does macroprudential policy restrain excessive credit growth expansion and strengthen resilience in the financial system? Second, upon policy implementation, are risk transmission and amplification channels weaker? Finally, could policy mitigate market and institutional vulnerabilities? (Forbes, 2019).

This chapter will take stock of the macroprudential policies and tools countries have deployed to reduce systemic risk, and examines the empirical evidence of their effectiveness.¹¹ Note that several sets of policy tools, such as capital and reserve requirements, are available to the authorities to pursue either microprudential or macroprudential objectives. The chapter focuses exclusively on the tools used to achieve macroprudential goals. It starts by examining the prudential tools in use by country authorities and central banks. Measuring the impact of macroprudential