The art of conducting macropru

This paper empirically assesses how effective macroprudential policies are at preventing and mitigating excessive procyclicality for credit, and whether their effectiveness is driven by how such policies are conducted over the business cycle. We use a sample of 42 OECD and non-OECD countries over the period 1990Q1-2019Q4 and propose an original macroprudential policy stance index that gauges the degree of countercyclicality of a policy, and we estimate whether it is an important determinant of credit procyclicality. Our results are based on an IPVAR model and confirm that the intensity of credit procyclicality decreases significantly as the degree of countercyclicality of the macroprudential policy increases. We find that the credit cycle responds less to a business cycle shock when the macroprudential policy is conducted in a countercyclical way. Consequently, our empirical findings highlight that the key to making macroprudential policies effective is the art of moving instruments in the right direction at the right time.