Macropru and the electoral cycle
Karsten Müller, in this paper, investigates empirically whether politics matter for changes to macroprudential policy across countries. In particular, he looked at 221 elections across 58 countries from 2000 through 2014. He finds that:
- Tightening macroprudential policies most directly aimed at the median voter is politically costly particularly when elections are approaching during credit booms and economic expansions;
- Although monetary policy is considerably less sensitive to upcoming elections in countries with independent central banks, there is little evidence that central banks are uniquely insulated from political pressures in implementing macroprudential policy. A possible explanation is that targeted credit policies may have much more obvious distributional effects;
- As a result, political pressures may limit the ability of regulators to “lean against the wind.”
Electoral Cycles in Macroprudential Regulation
Author: Karsten Müller
From: Princeton University
Macropru during crises
Ricardo Reis examines the different channels from macroprudential policy to the fiscal burden of the government. The presence and intensity of these channels depends on whether the economy is going through a fiscal crisis, a financial crisis, neither, or both. He highlights three fiscal footprints of macroprudential policy: First, tighter policy makes rolling over the public debt easier by rising the price of government bonds. Second, tighter policy reduces bank lending, investment, real activity, and future tax collections. Third, tighter policy lowers bailout costs, or their likelihood. The spillover effects take different shapes inside or outside a crisis:
- If there is no crisis, then the more present biased are the politicians in charge of fiscal policy, the more they will favor tighter macroprudential policy in order to be able to roll over the debt;
- If there is a fiscal crisis, tighter macroprudential policy can make the fiscal crisis more severe;
- If there is a financial crisis, macroprudential policy gains independence because preventing problems in the financial system will tend to ease the fiscal burden as well; and
- If there are both financial and fiscal crises, a diabolic loop between banks and the sovereign amplifies the fiscal impact of macroprudential policy i.e tighter macroprudential policy enhances the loop, and so makes fluctuations in the extend of the fiscal crisis more volatile.
The Fiscal Footprint of Macroprudential Policy
Author: Ricardo Reis
From: London School of Economics
