In recent years, macroprudential policy has become an increasingly active policy area. Many countries have adopted it as a tool to safeguard financial stability, in particular to deal with the credit and asset price cycles driven by global capital flows. This paper reviews the use of key macroprudential instruments and capital flow measures in 13 Asian economies and 33 economies in other regions since 2000, and constructs various macroprudential policy indices, aggregating sub-indices on key instruments. Asian economies appear to have made greater use of macroprudential tools, especially housing-related measures, than their counterparts in other regions. The effects of the macroprudential policy are then assessed through an event study, cross-country macro panel regressions and bank-level micro panel regressions. The analysis suggests that macroprudential policy and capital flow measures have helped curb housing price growth, equity flows, credit growth, and bank leverage. The instruments that have been particularly effective in this regard include loan-to-value ratio caps, housing tax measures, and foreign currency-related measures.

Since the mid-2000s, capital flows to Asia have surged and become increasingly volatile, recording a boom from 2006Q4 to 2007, followed by a sharp decline during the Global Financial Crisis (GFC), and another upswing from 2009 to 20012 that came to an end more recently. The post-crisis rebound of inflows was largely driven by robust regional growth, accommodative monetary policy in the United States and Europe, as well as by a structural shift in portfolio allocation towards emerging markets (IMF, 2011). The strong inflows led to a gradual buildup of financial imbalances, as credit growth and asset prices soared (Figures 2 and 3). Managing sizable capital flows and the associated financial risk has been a major challenge for policymakers in Asia, as monetary policy alone has proven to be an insufficient tool, for a number of reasons. In an open economy, raising the policy rate to dampen overheating pressures may induce even more capital inflows and exacerbate the financial stability challenges. Besides, monetary policy has an economy-wide impact, and can often be too costly to address sector-specific overheating. Furthermore, when asset price and inflation cycles diverge, monetary policy may face a difficult dilemma. These considerations have given rise to the increasing usage of a new policy instrument, macroprudential policy, which quickly became an important area of academic and policy discussion.