Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)?

Abstract

We show that macroprudential regulation significantly dampens the impact of global financial shocks on emerging markets. Specifically, a tighter level of regulation reduces the sensitivity of GDP growth to capital flow shocks and movements in the Chicago Board Options Exchange's VIX. A broad set of macroprudential tools contributes to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macro-economic stability. We do not find evidence that capital controls provide similar benefits.