DYNAMIC INTERACTIONS OF BANKING CRISES AND MACROPRUDENTIAL POLICIES IN DEVELOPING COUNTRIES

Abstract

In this study, it was econometrically analyzed whether macroprudential policies reduce the possibility of a bank crisis on case of the selected developing economies. In the analysis, data compiled from seven developing countries that are in the upper middle income group and have experienced two or more banking crises in the past forty years were used. Although the study focuses on the dynamic interactions between bank crises and macroprudential policies, some key macroeconomic variables such as growth rate and inflation rates, and the credit deficit, which is considered one of the leading indicators of bank crises, are also included in the analysis. All these variables were considered as dependent variables in modeling. On the other hand, oil prices and the policy rate of the FED were included in the models as independent variables to represent the effects of external shocks that can cause financial vulnerabilities and crises in developing economies. These variables was analyzed by panel structural qualitative vector autoregression (panel SQVAR) and impulse-response functions were calculated to detect the effects of possible shocks. The findings showed that macroprudential policies reduce the possibility of a bank crisis. However, it has also been observed that such policies cause a slowdown in economic activity. It can be said that this slowdown will be short-lived for developing countries with high growth potential. On the other hand, it has been determined that the probability of the banking system going into crisis increases if aggregate supply or aggregate demand shocks occur in the economy.