Macroprudential policies: Theory and applications

Before 2008 global financial crisis, developed countries have experienced sudden and Increased interaction and interconnectedness with globalization has increased the spread of destructive effects of possible crises in the financial system. This contagion effect has manifested itself in 2008 global financial crisis. This intertwining in the global financial system has increased the searches for policy makers and regulators to mitigate systematic risk and eliminate the financial instability. In this context, policy makers and regulators have developed measures that evaluate financial system as a whole and named as macroprudential policies to smooth out the financial cycles. Although there have been numerous studies on macroprudential policy especially after the global financial crisis, the knowledges about the effectiveness of these policies are still quite limited. In this dissertation, the long and short run effectiveness of macroprudential policy tools to prevent credit bubbles has analyzed for a large sample that covers 30 developed countries and 36 emerging markets during the period from 2004Q2-2013Q4 by heterogeneous dynamic panel data techniques. Additionally macroprudential policy tools has divided in two groups, identified as borrower based and financial institutions targeted macroprudential tools before including to analysis in this study. According to empirical findings of developed countries, when both group of macroprudential policy tools are implemented together, they are successfull to curb real total credit growth in both short and long run. The results also show that financial institutions targeted macroprudential policy tools have an adverse effect on real total credit growth in the long run for developed countries, while there isn't any statistically significant relationship is found among borrower based macroprudential policy tools and real total credit growth. Also the short run estimations for developed countries indicate that financial institutions targeted macroprudential policy tools hasn't got any statistically significant impact on real total credit growth. Empirical findings of emerging markets show that borrower based tools, financial institutions targeted tools and all tools together are effective to reduce excessive real total credit growth in the long run. But the short run estimations expose that macroprudential policy tools are unsuccessful to cushion rapid increase in total credit growth in emerging markets. In addition to these findings, the curbing impact of macroprudential policy tools on real total credit growth is found more significant and powerful on emerging markets compared to developed countries. Likewise empirical results reveal that financial institutions targeted macroprudential policy tools are more effective to reduce credit bubbles in emerging markets than developed countries. All of these findings indicate that, macroprudential policy tools are effective to smooth financial instabilities that arise from cyclical risks in financial system. Key Words: Financial Stability, Macroprudential Policies, Pooled Mean Group Estimator,Emerging Markets, Developed Economies.