Macro-prudential Regulations and Systemic Risk: The Role of Country-level Governance Indicators

This paper empirically examines the moderating role of country-level governance indicators (CGIs) in the relationship between macro-prudential policy instruments (MPI) and systemic risk. Results from 68 countries, involving the period 2000-2017, show that CGIs in terms of corruption controls, government effectiveness, regulatory quality, and rule of law play a negative moderating role in the MPI-systemic risk nexus. Countries scoring high (low) on these CGIs experience stability benefits (instability costs) from MPIs. These findings suggest that the mere implementation of macro-prudential regulations may not perform the intended function of systemic stability. Overall, institutional development in a country’s governance ecosystem is necessary, hence, a coordinated effort is required from all the stakeholders of the country.