MACRO-PRUDENTIAL POLICIES ARE WORKING, CENTRAL BANK REPORT SAYS
A report by a team of Central Bank researchers, published on May 22, found that macro-prudential policies (MPP) are effective tools to control domestic loan growth when the credit cycle is in a period of expansion. In the report called “Are Macro-prudential Policies Effective Tools to Reduce Credit Growth in Emerging Markets?” that was published on May 22, researchers Pinar Erdem, Etkin Ozen and Ibrahim Unalmis also said the higher number of MPP is associated not only with lower credit growth but also a shorter duration of credit growth after a global liquidity shock. After the 2008 global financial crisis, MPP have become an important part of the policy toolkit to maintain financial stability. Quantitative easing by advanced country’s central banks has increased the level of global liquidity and has helped ease external financial conditions for emerging markets and developing countries. Large capital inflows have created internal and external imbalances in those countries through lower interest rates and the appreciation of domestic currencies. One of the responses by these countries to limit imbalances is to employ various kinds of MPP tools. The average number of MPP implemented in emerging-market and developing economies was fewer than 2.5 policies in 2007, yet reached 3.5 in 2014. One of the possible consequences of MPP is the substitution of activities, subject to new MPP measures, to areas not subject to MPP measures. Results support the view that poorly designed MPP policies could lead to leakages in the financial system. Hence, MPP should be designed in a way that players of the financial system and borrowers cannot bypass the rules and regulations, the report said.