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Are macroprudential policy instruments effective? Evidence using difference-in-difference approach with heterogeneous treatment effects

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  • Vrinda Gupta
  • Amlendu Dubey

Abstract

We empirically investigate the effectiveness of 17 macroprudential policy (MPP) instruments on financial and macroeconomic stability for 98 emerging market and 36 advanced economies between 1990 and 2020. We use Difference-in-Difference estimators with heterogeneous treatment effects which are robust in estimating treatment effects as compared to time and group fixed effects estimators. We find that while in short-term MPP instruments stabilize capital & other investment flows, in longer term, the regulations may increase fluctuations. Further we find that the MPP regulation reduces leverage growth in short-term, however, it may increase leverage growth in longer term. Our results show that broadly, tightening MPP instruments has a stabilizing impact on financial variables. However, the results indicate that MPP may have negative spill-over effects on real GDP growth. The impact on real effective exchange rate depreciation is mixed.

Suggested Citation

  • Vrinda Gupta & Amlendu Dubey, 2024. "Are macroprudential policy instruments effective? Evidence using difference-in-difference approach with heterogeneous treatment effects," Applied Economics Letters, Taylor & Francis Journals, vol. 31(18), pages 1791-1803, October.
    • Handle: RePEc:taf:apeclt:v:31:y:2024:i:18:p:1791-1803
    DOI: 10.1080/13504851.2023.2206991
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