Macroprudential Policies and Volatility of Investments

The main aim of macroprudential policies (MPs) is to stabilize financial systems, but indirectly they also create more steady conditions in the overall economy. There are many studies in the literature investigating the impacts of MPs on economic variables. However, studies about their effects on the volatility of economic variables are limited, including the volatility of fixed investment. This paper tries to understand the impacts of MPs on the volatility of investment by using regression analyses with alternative measures of investment volatilities and MPs. A panel dataset covers the years from 1990 to 2018 for 135 developing and developed countries. The volatility of investment is measured by forward-looking rolling standard deviations. The principal regression method is panel regressions with time and country fixed effects. But alternative regression methods are also applied. The results show that the volatility of investment declines following MP adjustments. As the number of MPs increases, the volatility of investment drops. When the impacts of loose and tight MPs are investigated separately, the volatility of investment gets lower following tight MP changes but increases slightly with loose MPs. It is an interesting finding because the aim of both loose and tight MP changes is ultimately to create more stable conditions in financial markets and, as a result, in investment activities, but loose MPs seem to increase the volatility.