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

CAEPR WORKING PAPER SERIES 2018-007

54 Pages Posted: 20 Aug 2018 Last revised: 27 Feb 2019

See all articles by Hao Jin

Hao Jin

Wang Yanan Institute for Studies in Economics (WISE) and School of Economics, Xiamen University

Chen Xiong

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Date Written: July 1, 2018

Abstract

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.

Keywords: Credit Intermediary; Financial Frictions; Financial Openness; Macroprudential Policy

JEL Classification: E32, E44, F38, F41

Suggested Citation

Jin, Hao and Xiong, Chen, Financial Openness, Bank Capital Flows, and the Effectiveness of Macroprudential Policies (July 1, 2018). CAEPR WORKING PAPER SERIES 2018-007, Available at SSRN: https://ssrn.com/abstract=3228090 or http://dx.doi.org/10.2139/ssrn.3228090

Hao Jin (Contact Author)

Wang Yanan Institute for Studies in Economics (WISE) and School of Economics, Xiamen University ( email )

Economics Building D215
Xiamen University
Xiamen, Fujian 361005
China
86-592-2180353 (Phone)
86-592-2187708 (Fax)

HOME PAGE: http://haojin.weebly.com/

Chen Xiong

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

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