Abstract
The quake of the financial crisis has restored macroprudential policy as an apparent policy paradigm to minimize financial risk; however to a great extent, its impact depends on different externalities including country governance. Therefore, this paper aims to explore the joint impact of macroprudential policies (MPPs) and quality of country governance (CG) on financial risk (FR) for a panel of 124 countries covering the period 2000–2017. To attain this objective, we use directed acyclic graph to decide our model, construct indices for FR and governance by principal component analysis, investigate the impact of CG and MPPs at different quantiles of FR and explore their nonlinear relationship by panel threshold model. Besides, we also apply two-stage least squares (2SLS) and system GMM to address the endogeneity of the estimation. Our results show that both CG and MPPs are effective to minimize financial exposures and their effectiveness increases with higher FR, though after certain level, governance moderates the effect of MPPs on FR. Overall, we find MPPs are more effective in emerging economies and in normal time, whereas during crisis they are found less effective. Our findings are robust to alternative measures of risk and control variables and different econometric tests, which could be useful for policy makers to formulate MPPs, minimize financial risk and to maintain financial stability.
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Availability of data and materials
The datasets used and/or analyzed during the current study are publicly available in different sources cited in the reference of the paper.
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The codes used during the current study are available on reasonable request.
Notes
The insignificant coefficient of MPI at higher governance might be a result of the lower risk in those countries, as our findings of quantile regression (table 3) show MPI is insignificant at lower risk quantile.
Results of fixed effect and pooled estimations are available on request.
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Dutta, K.D., Saha, M. Nexus of governance, macroprudential policy and financial risk: cross-country evidence. Econ Change Restruct 54, 1253–1298 (2021). https://doi.org/10.1007/s10644-020-09301-9
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DOI: https://doi.org/10.1007/s10644-020-09301-9