Abstract
Macroprudential policy yields important benefits in terms of preventing and mitigating systemic risk, but it can also have an impact on economic growth, particularly on the left tail of the growth distribution. In this context, policymakers need to consider the effects of macroprudential policies on the entire growth distribution, and not only on average growth. The growth-at-risk (GaR) approach represents a useful framework for such an assessment. This paper describes the use of the GaR method and illustrates its implementation for assessing the impact of macroprudential policy on GaR in Indonesia. As a first step, I select 26 macrofinancial variables that are relevant for the Indonesian economy and build three partitions that capture financial conditions, macrofinancial vulnerabilities and other relevant factors. Results from quantile regressions have important policy implications, suggesting that an early tightening of macroprudential policy would reduce downside risks to Indonesia’s gross domestic product (GDP) growth by increasing the resilience of the financial system. Results further show that a materialization of risk, stemming from either a loosening of financial conditions, an increase of macrofinancial vulnerabilities or a deterioration of the macroeconomic environment have important effects on Indonesia’s GDP growth distribution and particularly on the left tail of the distribution, which represents the GaR. Under each of these scenarios, a tightening or loosening of the macroprudential stance, depending on the underlying vulnerabilities, yields high benefits in terms of improving Indonesia’s GaR, which range from 0.06 and 0.14 percentage points.
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Source: Author’s calculations
Source: Author’s calculations
Source: Author’s calculations
Source: Author’s calculations
Source: Author’s calculations
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Data availability
The datasets generated during and/or analyzed during the current study are available from the corresponding author on reasonable request.
Notes
This is done by assessing whether the respective observation is lower than (-1.5 * IQR) or higher than (1.5 * IQR); where IQR is the interquartile range and is defined as the difference between the third quartile and the first quartile.
Refer to Wilcoxon et al. (1963) for a discussion.
These include the following types of measures: countercyclical capital buffer; capital conservation buffer; capital requirements for banks (i.e., risk weights, systemic risk buffer, and minimum capital requirements); limits on bank leverage; liquidity requirements; and capital and liquidity surcharges applicable to domestic systemically important financial institutions (SIFIs).
Refer to Azzalini and Capitanio (2003) for a detailed description of the skew t-distribution.
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Maran, R. Impact of macroprudential policy on economic growth in Indonesia: a growth-at-risk approach. Eurasian Econ Rev 13, 575–613 (2023). https://doi.org/10.1007/s40822-023-00236-w
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DOI: https://doi.org/10.1007/s40822-023-00236-w
Keywords
- Growth-at-risk
- Growth distribution
- Macrofinancial vulnerabilities
- Macroprudential policy
- Quantile regression