The transmission of macroprudential policy in the tails: evidence from a narrative approach

We estimate the causal effects of macroprudential policies on the entire distribution of GDP growth by incorporating a narrative-identification strategy within a quantile-regression framework. Exploiting a data set covering a range of macroprudential policy actions across advanced European economies, we identify unanticipated and exogenous macroprudential policy ‘shocks’ and employ them within a quantile-regression setup. While macroprudential policy has near-zero effects on the centre of the GDP-growth distribution, we find that tighter macroprudential policy brings benefits by reducing the variance of future GDP growth, significantly and robustly boosting the left tail while simultaneously reducing the right. Assessing a range of potential channels through which these effects could materialise, we find that macroprudential policy operates through opposing tails of GDP and credit. Tighter macroprudential policy reduces the right tail of the future credit-growth distribution (both household and corporate) which, in turn, is particularly important for mitigating the left tail of GDP growth (ie, GDP-at-risk).