Question

4-qtr 96 ch . or no. of new measures 20 Housing MAPP Non-housing MAPP 161 Real credit growth 12 8- 4 -4 Real house prices -8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Fig. 2. Evolution of MAPP Use. 2000:-2013:04. Note: The figure shows average real credit growth (dashed line) and average real house price appreciation (solid line) across all 57 countries. The dotted bars (solid bars) show the total number of new nonhousing-related measures (housing-related measures) introduced by all countries in our sample in each quarter. Positve (negative) values indicate tightenings (easings).

See Figure 2 ‘Evolution of MAPP Use, 2000:Q1–2013:Q4’ in Akinci and Olmstead-Rumsey (2017). This figure shows quarterly data relating to average credit growth and house price appreciation as policy measures were introduced in 57 countries between 2000 and 2013.

Note: The figure shows average real credit growth (dashed line) and average real house price appreciation (solid line) across all 57 countries. The dotted bars (solid bars) show the total number of new non-housing-related measures (housing-related measures) introduced by all countries in our sample in each quarter. Positive (negative) values indicate tightenings (easings).

Akinci and Olmstead-Rumsey (2017) claim that the time-series data presented in Figure 2 shows that macro-prudential policies are associated with declines in credit growth and modest increases in house prices, and that the effects of the credit crisis on house prices and credit growth are similar in advanced and emerging economies. Evaluate both of these claims.

Answer 1

Macroprudential policies are associated with lower credit growth and this is more pronounced in case of small firms and entities that have limited non-banking finance. What should be considered here is that macroprudential policies are designed for the purpose of making financial crises either less likely or less severe. Credit growth declines as such policies curbs output growth by affecting credit supply and investment.

The second claim that the effects of the credit crisis on house prices and credit growth are similar in advanced and emerging economies also holds forth. This is because countries and economies that more frequently use macroprudential tools will tend to experience a GDP growth that is stronger as well as less volatile. The use of macroprudential policies helps in containing systemic risk and this contributes to macroeconomic stability, irrespective of the state of economy i.e. whether it is an emerging economy or a developed economy.