Rising spillover risks from macro-prudential policies
Tools used to rein in credit in specific sectors can increase the riskiness of credit in other areas
Central bank actions often have unintended spillover effects – not just those related to monetary policy, but also in financial regulation and macro-prudential policy.
The literature on cross-border spillovers of financial regulation has already documented that a tightening of regulations in the home country can lead to more and riskier lending by international banks in host countries.1,2
In the macro-prudential context, regulations limiting foreign exchange borrowing by banks can lead to
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