Research Insights: How Can Macro-Prudential Policy Control the Impact of Cross-Border Bank Flows on Emerging Market Economies?

Advanced economies (AEs) transmit economic crisis to Emerging Market Economies (EMEs) through cross-border bank flows, impacting their output, credit, and assets prices. Empirical evidence suggests that the transmission of the crisis from AEs to EMEs is higher in the absence of macro-prudential policy. A macro-prudential policy in the form of a levy on EMEs banks, when credit grows faster than deposits, reduces the propagation of AEs crisis to EMEs: the consumption drop is 12 percent lower, and the reaction of the labor market smoother, so consumers are better off with the policy than without it.