On the Macroprudential Policy Stance in an Emerging Economy

ABSTRACT

Our paper examines the macroprudential policy stance for the Romanian economy by considering simultaneously, unlike other papers, how borrower (Loan-to-Value Instruments) and capital-based instruments (Countercyclical Capital buffers, or CCyB) can be used together. We propose a forward-looking rule with lagged expectations for the CCyB, which is aligned with the European Systemic Risk Board’s recommendation regarding the moment of decision and implementation. Our paper also contributes to the literature by proposing a shock structure that is able to replicate that financial cycles are more volatile than economic cycles. Our main finding is that policy makers should comprehensively assess the resulting effects when deciding about the macroprudential policy stance.

KEYWORDS:

• CCyB
• DSGE
• emerging Europe
• financial-business cycle
• loss function
• LTV
• macroprudential policy
• welfare

JEL Classification:

• C53
• E27
• E32
• E44

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. The opinions expressed in this paper/presentation are those of the authors and do not necessarily reflect the views of the National Bank of Romania.

2. Dynare software, which we employ for the model computations, uses a Cholesky factorization for the variance-covariance matrix that yields an upper triangular matrix $\left[\begin{array}{cc}{\sigma }_A^2& {\mathit{\sigma }}_{\mathit{AO}}\\ 0& \mathit{f}\left({\sigma }_A^2,{\sigma }_0^2,{\mathit{\sigma }}_{\mathit{AO}}\right)\end{array}\right]$, where $\mathit{f}\left({\sigma }_A^2,{\sigma }_0^2,{\mathit{\sigma }}_{\mathit{AO}}\right)$ is a function of the two variances and the related covariances. After that, the resulting upper triangular matrix is handled in such a way that a productivity shock generates also a reaction of the other shock, while a housing demand shock has no effect on productivity.

3. For simplicity, here we use equal weights.

4. Because the utility function is logarithmic and the variables that enter it are lower than 1, the outcome is negative. For this reason, the welfare maximization actually implies the minimization of W.

5. We get annual data on productivity starting with 2011 and then we use spline interpolation to obtain quarterly growth rates.

Additional information

Notes on contributors

Alexie Alupoaiei

Alexie Alupoaiei has 15 years of experience within the Financial Stability Department of the National Bank of Romania, currently holding the position of senior advisor. In 2013, he obtained a PhD from the Faculty of Finance, Insurance, Banks, and Stock Exchanges at the Bucharest University of Economic Studies (ASE Bucharest). Additionally, in 2015, he completed a post-doctoral program at the Romanian Academy with a specialization in macroeconomics. In 2019, he earned a master’s degree in mathematics from the University of Bucharest, specializing in optimizations, probabilities, and statistics. His recent research activity focuses mainly on financial stability and macroprudential policy, quantitative macroeconomics and fiscal policy.

Matei Kubinschi

Matei Kubinschi is a senior advisor in the Financial Stability Department and has more than 10 years of experience in the National Bank of Romania. Matei graduated, as valedictorian, the courses of the DOFIN master’s program within the Faculty of Finance, Insurance, Banks and Stock Exchanges, ASE Bucharest and received his doctoral degree from the same university, in 2021, with the highest distinction. His research activity concerns topics of interest for financial stability and macroprudential policy such as the transmission mechanism of systemic risk, the estimation of the financial cycle or the identification of the determinants of non-performing loans.

Florian Neagu

Florian Neagu joined the National Bank of Romania in 2000, working over time in various departments involved in banking regulation, international relations or macroprudential policy. Presently, he is deputy director of the Financial Stability Department, where he works since 2005. He is a member of various working groups at the European level on financial stability and in the OECD Committee on Financial Markets. Moreover, he is a short-term expert of the International Monetary Fund and the World Bank on financial stability issues. He was valedictorian of the Faculty of Finance, Insurance, Banks and Stock Exchanges, within ASE Bucharest, class of 2000, where he holds a PhD in finance and works as an associate professor.