Finance, Growth and (Macro)Prudential Policy: European Evidence

Martin Hodula, Ngoc Anh Ngo

This paper examines the interactions between financial development, economic growth and (macro)prudential policy on a sample of euro area countries. Our main takeaway is that active (macro)prudential policy supports the positive finance-growth nexus instead of disrupting it. These benefits are found to be more likely to materialize during tightening of (macro)prudential policy measures and not during easing. This result is conditional on the ability of (macro)prudential policy to curb excess credit growth and mitigate systemic risk, which would otherwise disrupt the market. Moreover, we assert that when analysing the effects of (macro)prudential policy, it is important to account for the direction of (macro)prudential measures, not just for the frequency at which they are implemented.

JEL codes: G10, G28, O16, O40

Keywords: Development, finance, growth, macroprudential policy, panel analysis

Issued: September 2020

Download: CNB WP No. 2/2020 (pdf, 435 kB)