The interaction between macroprudential policy and monetary policy: Overview

• Author: Jin Cao,Konstantin Styrin,Sonalika Sinha,Dennis Reinhardt,Simon Lloyd,Robert Hills,Baptiste Meunier,Matthieu Bussière,Justine Pedrono,Jakob Haan,Rhiannon Sowerbutts
• Date: 01 February 2021
• DOI: http://doi.org/10.1111/roie.12505
• Published date: 01 February 2021

Rev Int Econ. 2021;29:1–19. wileyonlinelibrary.com/journal/roie

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© 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.12505

SPECIAL ISSUE PAPER

The interaction between macroprudential policy

and monetary policy: Overview

MatthieuBussière1

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JinCao2

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Jakobde Haan3,4,5

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RobertHills6

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SimonLloyd6

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BaptisteMeunier1

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JustinePedrono1

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DennisReinhardt6

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SonalikaSinha7

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RhiannonSowerbutts6

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KonstantinStyrin8

1Banque de France, Paris, France

2Norges Bank, Oslo, Norway

3De Nederlandsche Bank, Amsterdam,

Netherlands

4University of Groningen, Groningen,

Netherlands

5CESifo, Munich, Germany

6Bank of England, London, UK

7Reserve Bank of India, Mumbai, India

8Bank of Russia, Moscow, Russia

Correspondence

Robert Hills, Bank of England.

Email: robert.hills@bankofengland.co.uk

Abstract

This paper presents the main findings of an International

Banking Research Network initiative examining the interac-

tion between monetary policy and macroprudential policy in

determining international bank lending. We give an overview

on the data, empirical specifications and results of the seven

papers from the initiative. The papers are from a range of core

and smaller advanced economies, and emerging markets.

The main findings are as follows. First, there is evidence

that macroprudential policy in recipient countries can partly

offset the spillover effects of monetary policy conducted in

core countries. Meanwhile, domestic macroprudential policy

in core countries can also affect the cross-border transmis-

sion of domestic monetary policy via lending abroad, by

limiting the increase in lending by less strongly capitalized

banks. Second, the findings highlight that studying hetero-

geneities across banks provides complementary insights to

studies using more aggregate data and focusing on average

effects. In particular, we find that individual bank character-

istics such as bank size or GSIB status play a first-order role

in the transmission of these policies. Finally, the impacts dif-

fer considerably across prudential policy instruments, which

also suggests the importance of more granular analysis.

JEL CLASSIFICATION

F21; F36; F42; G21; E52

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BUSSIÈRE Et al.

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INTRODUCTION

This paper presents the methodology and broad results from an innovative, internationally co-ordi-

nated project of the International Banking Research Network (IBRN), which explores how the inter-

action of monetary and macroprudential policy affects the cross-border transmission of policy through

global banks.1 The project builds in particular on two previous IBRN initiatives that explored, sepa-

rately, the cross-border transmission of both monetary and macroprudential policy actions via bank

lending (for summaries, see Buch & Goldberg,2017; Buch et al.,2019).

Since the global financial crisis a decade ago, macroprudential policies have joined monetary policy

as an important component of policymakers’ toolkits (Blinder et al.,2017; Galati & Moessner,2018),

and international debates have increasingly focused on the impact of cross-border spillovers from

those actions. The interaction of monetary and macroprudential policy, however, remains under-ex-

plored, both academically and from a policy perspective.

This research initiative directly addresses two strands of the policy debate:

1. How does monetary policy in major economies spill over to the rest of the world? To what

extent can domestic macroprudential policy or capital flow management measures in recipient

countries offset monetary policy spillovers?2

2. How do monetary and macroprudential policy interact? Should these two instruments be seen as

complements or substitutes? Commentary on this issue (for instance, Broadbent,2018) has been

largely domestic in nature so far.

Despite the interest from policymakers, there is not yet a settled analytical backdrop to key aspects

of the debate. In the literature, there is a lively discussion on the extent to which there is a global

financial cycle, driven by core country monetary policy (for instance, Miranda-Agrippino & Rey, in

press), and the trade-offs this poses for policymakers (for instance, Bruno & Shin,2015). There is a

body of evidence on how prudential policy affects the domestic transmission of monetary policy (for

instance, Maddaloni & Peydro,2013) and an emerging strand on how prudential policies can offset the

unintended consequences of monetary policy (for instance, Takáts & Temesvary,2019). But, taken as

a whole, the empirical evidence on the extent to which macroprudential policy affects the transmission

of monetary policy and mitigates the propagation of shocks across borders remains scarce.

This initiative by the IBRN comprises six studies by economists from eleven central banks, plus a

cross-country study by economists from the Bank for International Settlements (BIS), all of which use

confidential micro banking datasets. The studies therefore emphasize the importance of understand-

ing heterogeneity in banks’ responses to monetary and macroprudential policy actions, which in turn

reflects the capital and liquidity position of individual banks, their risk profiles, access to different

types of funding such as through the wholesale market, availability of collateral, or access to an in-

ternationally active banking network, which themselves are indicators of underlying market frictions.

The purpose of the project is to move forward our collective understanding by applying, as far as

possible, a common empirical strategy to each country's individual bank-level dataset. This common

strategy is set out in Sections 2, 4 and 5 below. Given the range of possible cases of interactions that

teams could examine, this has not taken the form of an identical specification followed by all teams;

rather, the different teams have tailored the common approach to fit the idiosyncratic characteristics

of their countries. So, unlike for previous IBRN projects, this overview paper does not conduct formal

meta-analysis; instead, it places the results in a common framework.

These conclusions are based on seven papers (some of the central banks have teamed up to write

a joint paper rather than one paper per country). These span research for the: United States; United