Macroprudential Policy and Bank Systemic Risk: Does Inflation Targeting Matter?

Macroprudential Policy and Bank Systemic Risk: Does Inflation Targeting Matter?
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Volume/Issue: Volume 2023 Issue 119
Publication date: June 2023
ISBN: 9798400245008
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Summary

This paper investigates macroprudential policy effects on bank systemic risk and the role of inflation targeting in such effects. Using bank-level data for 45 countries comprising various monetary and exchange rate regimes, our regime-dependent dynamic panel regression results point to complementarities between monetary and macroprudential policies. We find that the tightening of most macroprudential tools—including DSTI and LTV limits, and capital requirements—reduces bank systemic risk further under inflation targeting. Our findings lend credence to the view that inflation targeting strengthens macroprudential policy roles in mitigating financial stability risks.