Global Financial Cycle, Household Credit, and Macroprudential Policies

We show that macroprudential policies dampen the impact of global financial conditions on local bank credit cycles. For identification, we exploit variation in the U.S. volatility index (VIX) and household and business credit registers in an emerging market economy in which banks depend on foreign funding and macroprudential measures vary over the full cycle. Our results suggest that when the VIX is low, tighter macroprudential policies reduce household lending, notably for riskier (foreign currency (FX) and high debt-service-to-income) loans and by banks dependent on foreign funding. Moreover, they increase (less regulated) local currency lending to real estate firms. Such periods are associated with less subsequent total lending to households and firms and with a lower share of FX loans at the local level. Consistently, when the VIX is low, tighter macroprudential policies dampen house prices and economic activity.