Macroprudential Policy and Financial Risk: The Moderating Role of Financial Innovation

Using an unbalanced panel dataset of OECD countries from 1990 to 2021, this paper examines how financial innovation shapes the effectiveness of macroprudential policy in mitigating country-level financial risk. The results show that macroprudential tightening significantly reduces country-level financial risk and that financial innovation, on average, strengthens the effectiveness of macroprudential policy. Importantly, the moderating role of innovation is heterogeneous: it is more pronounced in non-Eurozone than in Eurozone economies and differs across financial structures—strengthening policy transmission in bank-driven systems but attenuating it in market-driven systems. These findings highlight the need for regulatory frameworks that integrate financial innovation into macro-financial risk management.