Nexus of governance, macroprudential policy and financial risk: cross-country evidence
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Nexus of governance, macroprudential policy and financial risk: cross‑country evidence Kumar Debasis Dutta1,2 · Mallika Saha1,3 Received: 7 January 2020 / Accepted: 27 September 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract The quake of the financial crisis has restored macroprudential policy as an apparent policy paradigm to minimize financial risk; however to a great extent, its impact depends on different externalities including country governance. Therefore, this paper aims to explore the joint impact of macroprudential policies (MPPs) and quality of country governance (CG) on financial risk (FR) for a panel of 124 countries covering the period 2000–2017. To attain this objective, we use directed acyclic graph to decide our model, construct indices for FR and governance by principal component analysis, investigate the impact of CG and MPPs at different quantiles of FR and explore their nonlinear relationship by panel threshold model. Besides, we also apply two-stage least squares (2SLS) and system GMM to address the endogeneity of the estimation. Our results show that both CG and MPPs are effective to minimize financial exposures and their effectiveness increases with higher FR, though after certain level, governance moderates the effect of MPPs on FR. Overall, we find MPPs are more effective in emerging economies and in normal time, whereas during crisis they are found less effective. Our findings are robust to alternative measures of risk and control variables and different econometric tests, which could be useful for policy makers to formulate MPPs, minimize financial risk and to maintain financial stability. Keywords DAG · Country governance · Macroprudential policy · Panel threshold · Quantile regression · System GMM * Kumar Debasis Dutta [email protected] Mallika Saha [email protected] 1
School of Finance, Zhongnan University of Economics and Law, Wuhan 430073, People’s Republic of China
2
Department of Finance and Banking, Patuakhali Science and Technology University, Patuakhali, Bangladesh
3
Department of Accounting & Information Systems, University of Barishal, Barishal, Bangladesh
13
Vol.:(0123456789)
Economic Change and Restructuring
JEL Classification G18 · G21 · G28
1 Introduction Financial atmospheres are changing apace and becoming vulnerable in terms of depleting resources, increasing capital flows across countries and evolving channels of global financial contagion prevailing in open and allied economies within the context of neo-liberal and free-market capitalism. Thus, crisis can be transmitted from economies to economies through the channel of cross-border transactions and credit flow (Bruno and Shin 2012, 2014; Lane and Mcquade 2013; Beirne and Friedrich 2017) and can cause devastating consequences. MPPs are designed to prevent such financial catastrophe by regulating any massive capital flow that can end up badly. However, even after the decade of restoring MPPs since the 2007–2008 crisis (Clement 2010), consensus re
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