This project investigates the topics related to financial instability and the possibility of controlling the financial cycle by means of a new policy paradigm which includes both macroprudential policy (MPP) and monetary policy (MP). The main research questions are the following three: how does MPP work when feedback effects and cross-section spillovers mechanisms are taken into account? Does MP perform better in the same scenario? How may MP and MPP be coordinated? The final dissertation will address these questions from both an empirical and a theoretical viewpoint. In the first two papers we investigate empirically the effects of MP and MPP interventions in the Euro Area. Once we have pointed out the stylized facts about credit booms in the Euro Area we employ a Mixed-Cross-Section Global VAR model (MCS-GVAR) and a logistic model that estimates the probability of being in a state of potential financial instability. In the final part of the project we aim at evaluating the results obtained through the empirical analysis by mean of a theoretical model that should serve to assess the optimal MP-MPP intervention and how they may coordinate.
The purpose of the paper is to assess the impact of ex ante policy measures, preventive to the crisis, aimed at improving the resilience of the financial system and smoothening the financial cycle, while taking into account the macro impact on the business cycle at both domestic, banking system and across borders level. On the methodological side, we use three instruments related to different branches of the existing literature. We identify credit booms in the Euro Area countries following the threshold method proposed by Mendoza and Terrones (2012). The advantage of our event analysis is that we have enough post-2008 observations to analyze the behavior of the main macro variables in the aftermath of both the global financial crisis and the European sovereign debt crisis. Then, our paper relies on two different empirical models: the Early Warning model, which estimates the probability of being in a state of financial vulnerability, allows to justify the ex ante policy intervention. We empirically envisage that credit conditions matter for financial stability but on a different extent according to country macro conditions. The second model involved is a Mixed-Cross-Section Global VAR. This is a novel approach in the GVAR literature developed by Groß et al. (2013) and its advantages are countless. The Mixed-Cross-Section approach allows to study endogenous feedback effects and spillovers between and within cross-sections. In our paper we consider three cross-sections: country, banking system and central bank. One innovation of our paper is that we apply within the central bank cross-section the Taylor rule's weights that the ECB applies for Euro Area countries. For the empirical setting we follow the methodology developed by Behn et al. (2016), however we envisage to improve the current literature at least in three respects. To our knowledge this is the first empirical study comparing the effectiveness of both monetary policy and macroprudential tools in a multi-country macro setting. This would both address the debate on inflation targeting through our cost-benefit analysis and enrich the knowledge of the monetary transmission channel in EA through the ex ante monetary policy intervention. Second, through the study of feedback effects and the spillovers engendered through the macroprudential interventions in a single country we would be able to better understand how credit dynamic works in the Euro Area and how banking systems are interrelated. Third, the multi-country perspective of our study allows to reinforce the idea that policy interventions set at central level cannot rely only upon one-size analyses and that countries specificities and interconnections must be carefully taken into account.