Eurozone macro-prudential policies have large cross-border effects – ECB paper

Macro-prudential policies in the eurozone have significant cross-border spillovers, a working paper published by the European Central Bank finds.

In Macro-prudential policy in a monetary union with cross-border banking, Matthieu Darracq Pariès, Christoffer Kok and Elena Rancoita present a two-country dynamic stochastic general equilibrium model. The authors calibrate their model for the four largest euro area countries – France, Germany, Italy and Spain.

They pay particular attention to modelling cross-country financial and trade linkages, and each country’s specific banking sector characteristics.

The authors find that “countercyclical macro-prudential interventions are supportive of monetary policy conduct through the cycle”. This effect is especially strong when different states in the monetary union exhibit asymmetric financial cycles, they say.

The authors say their findings make a case for for “targeted country-specific macro-prudential policies to help alleviate the burden on monetary policy”. Their findings also indicate that eurozone policy-makers need to account for the cross-border spillovers caused by macro-prudential measures, they argue.