Macroprudential policy and the inward transmission of monetary policy: The case of Chile, Mexico, and Russia

• DOI: http://doi.org/10.1111/roie.12503
• Published date: 01 February 2021
• Date: 01 February 2021

Rev. Int. Econ. 2021;29:37–60. wileyonlinelibrary.com/journal/roie

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37

© 2020 John Wiley & Sons Ltd

Received: 30 November 2019

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Revised: 15 July 2020

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Accepted: 4 September 2020

DOI: 10.1111/roie.12503

SPECIAL ISSUE PAPER

Macroprudential policy and the inward

transmission of monetary policy: The case of Chile,

Mexico, and Russia

GeorgiaBush1

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TomásGómez2

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AlejandroJara2

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DavidMoreno2

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KonstantinStyrin3,4

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YuliaUshakova3

Abbreviations: FX, foreign exchange; SOE, small open economy; ZLB, zero lower-bound.

1Banco de México, Distrito Federal,

Mexico

2Banco Central de Chile, Santiago, Chile

3The Central Bank of the Russian

Federation, Moscow, Russia

4New Economic School, Moscow, Russia

Correspondence

Georgia Bush, Banco de México, Av. 5 de

Mayo 2, Centro Histórico de la Ciudad de

México, 06000, Distrito Federal, México.

Email: gbush@banxico.org.mx

Abstract

This paper studies whether domestic macroprudential

policy may attenuate the inward transmission of monetary

policy shocks from the United States to domestic bank lend-

ing growth in three emerging market economies—Chile,

Mexico, and Russia. Identification relies on banks’ heter-

ogeneous exposure to prudential policies and the fact that

foreign monetary policy shocks are exogenous from the per-

spective of these economies. After analyzing the effects of

the aggregate domestic prudential policy stance, we focus

on specific prudential policies targeting mortgage and con-

sumer loans, as well as foreign-currency deposits. Although

our overall results are mixed, we find evidence that the

strength of international monetary policy spillovers varies

depending on the stance of domestic macroprudential pol-

icy. In particular, a tighter reserve requirement stance over

foreign-currency deposits in Chile dampens the effect of

an international monetary policy shock on domestic local-

currency lending, but reinforces that on foreign-currency

lending, whereas in Russia, it dampens the effect on both

local-currency and foreign-currency lending, although to

different degrees. Prudential policies targeting the asset side

of banks’ balance sheets, such as mortgage loans or con-

sumer credit, are found to amplify international monetary

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BUSH et al.

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INTRODUCTION

In theory, under perfect capital mobility and a free-floating currency regime, foreign-exchange rates adjust

to absorb foreign shocks. Spillovers from foreign monetary policies would be limited, and domestic mone-

tary policy would retain its autonomy. However, in the presence of financial frictions, this may not be the

case. Rey (2015, 2016) finds evidence that challenges the Mundellian trilemma, showing that U.S. mone-

tary policy affects prices in many global markets, even under floating-currency regimes. Simultaneously,

since the Global Financial Crisis (GFC), the consensus has moved toward the use of “macro” and “micro”

prudential policies to strengthen national financial systems’ ability to face shocks (Alam etal., 2019;

Cerutti et al., 2017b). The domestic and cross-border effects of these prudential policies are part of a bur-

geoning research agenda, but their interaction with monetary policy remains under-explored.

This paper aims to fill the gap by presenting evidence on the attenuation of international monetary

policy spillovers by domestic macroprudential policies, using confidential data on the balance-sheet

exposures of banks in three emerging economies: Chile, Mexico, and Russia. We contribute to the

currently limited literature on the use of domestic macroprudential tools to curb foreign monetary

policy spillovers into domestic lending.

Foreign monetary policy may affect the domestic supply of banking credit via several channels, as has

been discussed in the literature (see Bussière etal., 2020a). In the case of the emerging market economies,

using syndicated loan data, Bräuning and Ivashina (2017) shows how the differential between an emerg-

ing market economy policy rate and that of the United States affects the extension of credit to that emerg-

ing market economy, an outward spillover. Key results reported in Buch et al. (2019) show that inward

monetary policy spillovers, the same case we analyze in this paper, were evident in all of the countries

included in the meta-study, and that the U.S. monetary policy was the dominant core country monetary

policy showing spillover effects. Lastly, the spillover effects were more substantial for emerging than de-

veloped economies. In particular, Gajewski et al. (2019) show evidence of international monetary policy

spillovers to domestic lending in the case of Chile, Korea, and Poland; while Kruglova and Styrin (2017)

do the same for Russia. Moreover, studies using credit register data, such as Morais et al. (2019), for the

case of Mexico, and Giovanni et al. (2017) and Baskaya et al. (2017) for the case of Turkey, show a neg-

ative spillover effect of international financial conditions and capital inflows on domestic bank lending.

In terms of the impact of prudential policies, the state-of-the-art paper on the effects of macropru-

dential policy is Jiménez et al. (2017). The authors use credit registry data, including loan-application

forms, to identify the effects of changes in the dynamic provisioning policy implemented by the Banco

de España since the end of the 1990s. Regarding the interactions between domestic macroprudential

and domestic monetary policy, Gambacorta and Murcia (2017) use credit registry data and find that

the two types of policy reinforce each other.

As for the evidence on the interaction between domestic prudential policy and foreign monetary

policy, several papers are worth mentioning. Epure et al. (2018) use credit registry data to study how

domestic macroprudential policy interacts with international financial conditions to affect the domes-

tic lending in Romania. Takáts and Temesvary (2019) and Avdjiev et al. (2020) study the impact of

macroprudential and monetary policy interactions on cross-border lending. These studies emphasize

policy spillovers in some cases and attenuate it in others,

depending on the country context.

JEL CLASSIFICATION

E32; F32; F34; G21; G15