The Effectiveness of Macroprudential Policy Coordination in Managing Financial Risk in Systemic Economies

This study evaluates the relative effectiveness and feasibility of synchronized and country-specific macroprudential policies in advanced systemic economies (ASEs) and systemic middle-income countries (SMICs). The analysis is motivated by the growing policy tension between the potential global financial stability gains from macroprudential coordination and the loss of domestic policy autonomy that such coordination may impose. To address this issue, the study develops a common macroprudential policy index (CMPI), which captures the shared component of macroprudential actions across countries and serves as a proxy for cross-country macroprudential policy coordination. In doing so, the study provides an empirical framework for assessing whether synchronized macroprudential policies generate more effective outcomes than country-specific interventions, thereby offering insights into the practical feasibility of international macroprudential coordination. Using a Dynamic Common Correlated Effects (DCCE) model and a Panel Structural VAR (PSVAR), the study examines the effects of domestic and coordinated macroprudential policies on capital flows, credit growth, and house prices. The findings reveal important differences across short-run and long-run horizons. In the long run, both domestic macroprudential policy (MPI) and coordinated macroprudential policy (CMPI) exert contractionary effects on capital flows, consistent with tighter credit conditions and higher lending costs. However, PSVAR results show that synchronized macroprudential shocks can temporarily increase capital flows, credit, and house prices through volatility reduction, portfolio reallocation, and cross-border spillover channels. These effects are transitory, indicating that coordinated policies primarily shape short-run financial adjustment dynamics rather than permanently increasing global liquidity. Overall, the results suggest that macroprudential coordination between ASEs and SMICs is feasible, particularly in areas related to systemic risk containment, volatility management, and the mitigation of destabilizing cross-border spillovers. However, the heterogeneous responses across countries also indicate that effective coordination requires a flexible framework in which broad common principles are coordinated internationally while domestic authorities retain discretion to calibrate instruments according to local financial conditions and vulnerabilities.