Comparison of advanced economies’ performance in bubbles mitigation
| DOI | https://doi.org/10.1108/JFRC-06-2018-0088 |
| Pages | 397-421 |
| Date | 12 April 2019 |
| Published date | 12 April 2019 |
| Author | Emilio Gallego Neira,Carlos Martínez de Ibarreta |
Comparison of advanced
economies’performance in
bubbles mitigation
Emilio Gallego Neira and Carlos Martínez de Ibarreta
Faculty of Economics and Business, Universidad Pontificia Comillas,
Madrid, Spain
Abstract
Purpose –This paper aims to analyzethe effectiveness of macroprudential and fiscal policies takenfrom a
sample of ten advancedeconomies in relation to the mitigation of real-estate and credit bubblesby comparing
their performance.
Design/methodology/approach –This comparisonis elaborated with a seemingly unrelated regression
methodology, whichallows the assessment of individual countries’performanceand improves the estimation
of the dependent variablesversus an individual regression.
Findings –The analysis concludes that countercyclical measures have been more effective to control the
growth of household debt. Furthermore, this study validates that macroprudential measures focused on the
residential sector meet their objective of controlling the growth of house prices, whereas those
macroprudentialmeasures with more generic targets are effectiveto control the growth of household debt.
Originality/value –As opposed to previous panel-regression studies, which have analyzed the
performanceof macroprudential and fiscal measures in genericterms, this paper compares the performance of
these tools in ten advanced economies. Based on the analysis performed, several recommendations are
derived forpolicymakers.
Keywords Systemic risk, Credit bubbles, Countercyclicality, Fiscal measures,
Macroprudential measures, Real-estate bubbles
Paper type Research paper
1. A motivation for the study
The aim of the present study is the analysis of the effectiveness of the control measures that
financial regulators can take to mitigate real-estate and credit bubbles and to prevent
systemic risk. Some of these could havebeen taken before the recent international financial
crisis to reduce its impact. We performthis analysis based on an econometric methodology
with data froma group of ten adv anced economie s. Among the cont rol measures us ed by
financial regulators and governments, we found fiscal and monetary policies, as well as
macroprudential measures and microprudential supervision. Starting with the
monetary policy, this has a broad impact, affecting all economic activity as a whole, as
well as a series of limitations in contexts such as European Monetary Union, where the
responsibility resides with the European Central Bank. Furthermore, microprudential
supervision was found to be insufficient to prevent the recent international financial
crisis. This study, therefore, focuses on analyzing the remaining mentioned measures:
fiscal and macroprudential.
JEL classification –E58, R31
Bubbles
mitigation
397
Received5 June 2018
Revised15 December 2018
Accepted8 February 2019
Journalof Financial Regulation
andCompliance
Vol.27 No. 4, 2019
pp. 397-421
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-06-2018-0088
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
Most prior studies of theeffectiveness of these measures have been econometric and used
panel regressions. Many have been published by institutions such as the Bank for
International Settlements (BIS) or the International Monetary Fund (IMF). One research
stream has analyzed the effectiveness of these measuresin generic terms, using data from a
wide group of countries. Kuttner and Shim (2013), for example, analyzed the impact of
macroprudential measures on asset pricesand credit from 1980, for a group of 57 countries.
Lim (2011) analyzed, using the regression-panel methodology, how macroprudential
measures impact credit volumes and minimize credit procyclicality, defined as the
correlation betweenGDP and credit, using data from 49 countries.
The second research stream has analyzed the performanceof measures taken by specific
countries. In SouthKorea (hereafter, Korea), Igan and Kang (2011) performed an econometric
study to analyze the effectiveness of borrower-targeted macroprudential measures for the
period 2002-2010, concluding that only restrictive limits were effective in controlling house-
price growth. However, they concluded that expansionary and restrictive limits were
effective in controllinghousehold-debt growth.
Our study provides an econometric testing of two hypotheses concerning the greater
effectiveness of macroprudential and fiscal measures when conducted in a countercyclical
way and implemented with a focused approach.A focused approach to the housing market
(borrower-targeted and fiscal measures) is more effective in controlling house-price growth
and more generic measures (targeted at a financial institution) are more effective in
controlling household-debt over GDP growth. These hypotheses are based on the previous
literature, but we test themin a different way. As opposed to the more generic approaches of
previous studies, this paper analyzes the effectiveness of macroprudential and fiscal
measures by comparing their performance in ten advanced economies. We achieve this by
using a seemingly unrelated regression (SUR) methodology, which allows obtaining
different betas for allcountries analyzed. In contrast, many previous studies haveused panel
regressions; thus, estimatingcommon betas for all countries contemplated and analyzed the
effectiveness of measures in generic terms with data of a larger number of countries over a
time span. The second group of prior studieshas evaluated the performance of the measures
taken by a specific country.
As a second contribution, this study analyzes the effectiveness of measures grouped in
three typologies (borrower-targeted, financial-institution-targeted and fiscal) to facilitate the
drawing of conclusions, as opposed to an analysis of individual measures (reserve and
liquidity requirements, credit provisions, LTV and DTI limits, etc.). This study analyzes
which measure types are the most effective, depending on the target: house-price or
household-debtgrowth.
The remainder of this paper is organized as follows: objectives and hypotheses in
Section 2; conceptual framework in relation to macroprudential and fiscal measures in
Section 3; empirical methodology used in the econometric models in Section 4; results
obtained in Section 5; discussionof the results in Section 6; and conclusions in Section 7.
2. Objectives and hypotheses
In this study, we elaborate an econometric model to analyze the effectiveness of fiscal
and macroprudential measures to mitigate real-estate and credit bubbles and to prevent
systemic risk. This model allows us to compare performance between countries and
validate two hypotheses built upon the countercyclical profile and targets of the
measures. The sample includes five countries that used a wider set of macroprudential
measures in the period 2000-2012 and five countries that used narrower ones. The
effectiveness of the measures is analyzed in relation to house-price growth and
JFRC
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