The impact of macroprudential policies on industrial growth

Summary

Focus

Many countries have implemented macroprudential policies, especially in the aftermath of the Great Financial Crisis. Most studies estimate the effect of macroprudential measures on credit; estimates of its impact on economic growth are still lacking. One reason for the difficulty in obtaining reliable estimates of the effect on economic growth is the reverse causality problem – authorities take future growth into account when making their decisions.

Contribution

I focus on the effect of macroprudential policies on manufacturing growth, using panel data from 89 countries and 23 industries. Since manufacturing industries are small and usually outside of regulators' responsibility, the model adequately identifies the effect of prudential policies on manufacturing growth. Furthermore, the analysis studies the growth effect of macroprudential policies according to different industries' needs for external funds.

Findings

I find that macroprudential tightening measures have a negative impact on manufacturing growth, but only for industries highly dependent on external finance. The growth impact is economically sizeable and can persist over three years. For an industry fully dependent on external finance, growth falls by 0.3% within the year following each macroprudential policy tightening and by 0.9% overall over a three-year period. The growth reduction is stronger in advanced economies, with manufacturing growth of fully dependent industries falling by 1.1% in advanced economies and 0.7% in emerging markets over a three-year period. This loss is stronger during banking crises and periods of higher growth. Higher private credit growth mitigates the negative growth impact. Finally, there is evidence that macroprudential policies mitigated the fall in growth during the Great Financial Crisis and the Covid-19 pandemic.

Abstract

This paper analyses the causal impact of macroprudential policies on growth, using industry-level data for 89 countries for the period 1990 to 2021. The small industry size creates an exogenous identification and avoids reverse-causality. I find that macroprudential tightening measures have a negative impact on manufacturing growth, but only for industries with high external finance dependence. This effect is stronger during banking crises, periods of higher output growth and for advanced economies. The e§ect is weaker during period of high private credit growth. Growth effects on externally dependent industries are economically sizeable and can persist over three years.

JEL Classification: E44, G28, O10, O16

Keywords: macroprudential policy, financial development, growth, external finance dependence, credit frictions