Finance, Growth and Macroprudential Policy

Abstract

This doctoral dissertation explores the complex relationship between financial development and financial stability, with a particular focus on the role of macroprudential policy. The primary objectives are to investigate how macroprudential policy influences the finance-growth nexus, its differential impact on non-bank financial intermediation compared to traditional banking, and the implications of alternative lending developments for financial stability. First, we examine the effects of macroprudential policy actions on the finance-growth nexus in 12 euro area countries. Our findings suggest that active macroprudential policy supports the positive finance-growth relationship rather than disrupting it. This highlights the importance of considering macroprudential measures when analyzing the finance-growth nexus. Notably, these benefits are more pronounced during the tightening of macroprudential measures, as opposed to their easing. The efficacy of these policies hinges on their ability to curb excessive credit growth and mitigate systemic risk, thereby preventing market disruptions. Furthermore, it is crucial to account for the direction of macroprudential measures, not just their frequency, when assessing their impact. Second, we analyze the impact of macroprudential policy on non-bank financial intermediation, a significant component of the modern financial sector. Our analysis utilizes a~comprehensive dataset covering 23 European Union countries, focusing on a narrow measure of shadow banking that captures credit intermediation by non-banks. Our results robustly demonstrate that macroprudential policy tightening leads to an increase in shadow bank lending. By leveraging the cross-sectional dimension of our data, we show that this effect is particularly pronounced in low-capitalized banking sectors, where macroprudential policy is more binding, resulting in credit reallocation from banks to non-banks. This evidence supports the need for a~level playing field for both bank and non-bank credit institutions. Third, we assess the effects of non-bank financial intermediation on financial stability, which macroprudential policy aims to promote. Using a large international panel dataset of 78 countries, we find that the overall relationship between digital lending developments and financial stability is negative. However, this relationship becomes positive in countries with low levels of bank concentration.