Balancing financial stability and economic growth: a comprehensive analysis of macroprudential regulation

The purpose of this study is to explore the influence of macroprudential measures on financial stability in both advanced and emerging economies, considering key endogenous variables such as banking crises and economic growth. Our analysis covers 66 countries over the period 2000–2017 and focuses on two effects: the direct stabilizing effect, which reduces the likelihood of banking crises, and the indirect destabilizing effect, which may slow down the GDP growth. Employing Generalized Impulse Response Function modeling, we assess the efficacy of macroprudential policy tools. Our findings suggest that macroprudential tightening is more effective in reducing the likelihood of banking crises than in stimulating economic growth, particularly when the impact of macroprudential tools is positive. Ultimately, our study highlights the interplay between the probability of banking crises and financial stability, demonstrating the importance of macroprudential regulation in promoting a stable and resilient financial system.