BIS Study of 1,000 Anti-Crisis Policy Tweaks Reveals Growth Boon

(Bloomberg) -- Central banks seeking to ward off financial crises using so-called macroprudential policies might also even nurture economic growth in the process, according to a global study spanning a quarter of a century of data.

The analysis from the Basel-based Bank for International Settlements, published in its quarterly review on Sunday, counters conclusions from previous work that found such actions risked harming expansion. The study was based on a tally of 1,149 attempts to foster financial stability using macroprudential tools -- such as caps on loan-to-value ratios -- in a 25-year stretch starting in 1990.

“Macroprudential” was a term seldom used for much of that period, having been coined in the 1970s and then mainly revived this century, most notably when BIS official Claudio Borio argued in 2003 for greater deployment of such policies and claimed that “we are all (to some extent) macroprudentialists now.” 

In the wake of the global financial crisis starting in 2007, more formal frameworks have developed for them, though many measures used long before then would still qualify under that label.

“It has been argued that macroprudential measures achieve higher stability at the cost of a suboptimal level of credit and investment, which could hinder long-run economic growth,” the researchers, including BIS Deputy General Manager Luiz Pereira da Silva, wrote in the review. “We find that the more active a country is in the use of macroprudential measures, the higher and less volatile is its per capita GDP growth.”

The benefits on growth from a macroprudential regime depend on the degree of openness and financial development in an economy, the researchers said. Such policies tend to be less effective in countries that are either very open or very financially developed, though when both such conditions exist together, “macroprudential measures gain in effectiveness.”

The researchers also suggest that ad-hoc use of such tools, as opposed to a more systematic framework, tends to hurt growth.

“This result could suggest that macroprudential policies, like any therapy, can have side effects and must be properly administered,” the economists wrote.  

Aside from Pereira da Silva, the other authors of the study were Codruta Boar, Leonardo Gambacorta and Giovanni Lombardo.

To contact the reporter on this story: Craig Stirling in Frankfurt at cstirling1@bloomberg.net.

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net, Fergal O'Brien, Andrew Atkinson