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Monetary policy spillovers and the role of prudential policies in the European Union

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  • Coman, Andra

Abstract

This paper explores how prudential policies can reduce the macro-financial spillover effects of foreign monetary policy on EU countries. Using local projection methods, I demonstrate that countries with stricter prudential policies experience smaller and less negative spillovers to bank credit and house prices following monetary policy tightening in the US, UK, and EA. Macroprudential measures, such as capital buffers, lending standards restrictions, and limits on credit growth, are particularly effective in mitigating spillovers from US monetary policy. In contrast, microprudential measures, including minimum capital requirements, risk weights, and limits on large exposures, work well in countering spillovers from UK monetary policy. The findings suggest that domestic prudential policies can help EU countries reduce their exposure to foreign monetary shocks. These policies may serve as valuable tools to manage spillovers from centre economies and within the EU.

Suggested Citation

  • Coman, Andra, 2025. "Monetary policy spillovers and the role of prudential policies in the European Union," International Review of Economics & Finance, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:reveco:v:99:y:2025:i:c:s1059056025000826
    DOI: 10.1016/j.iref.2025.103919
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    More about this item

    Keywords

    International spillovers; Local projections; Policy interactions; Monetary policy; Prudential policy;
    All these keywords.

    JEL classification:

    • 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
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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