Financial Openness, Bank Capital Flows, and the Effectiveness of Macroprudential Policies-College of Economics

Working Papers

Location: Home -> Research -> Working Papers -> Content

Author	Hao Jin, Chen Xiong
Content	This paper quantitatively examines the effects of macroprudential policies on credit growth in open economies. We develop a small open economy DSGE model where banks choose their funding sources (domestic vs. foreign deposits) and subject to financial constraints. Our model predicts that banks reduce leverage in response to a macroprudential policy tightening, but they increasingly rely on foreign funding. This endogenous liability composition shifts significantly undermine the stabilizing effect and welfare gains of macroprudential policies. Our results suggest macroprudential policies are less effective and should be set more aggressive in financially more open economies. Finally, we find empirical support for the model predictions in a group of developing and emerging economies.
JEL-Codes	E32, E44, F38, F41
Keywords	Credit Intermediary; Financial Frictions; Financial Openness; Macroprudential Policy.

Research