Macro-prudential policy and financial stability: Generic versus sector-specific rules

This paper considers the implications of macro-prudential policy in a setting where different types of borrowers from distinct sectors of the credit market co-exist. To identify the optimal policy design, we consider two macro-prudential policy regimes, namely generic and sector-specific counter-cyclical loan-to-value (CcLTV), and compare their effectiveness in enhancing financial and macroeconomic stability. The results show that both regimes are effective in this regard, especially when the economy is hit by financial and housing demand shocks. The effectiveness of both regimes is, however, shock-dependent. To enhance the effectiveness of CcLTV regulation, we argue that the regulator should consider borrowers’ heterogeneity and the origin of the shocks, and tailor the CcLTV regulation according to the specific conditions of each sector of the credit market, rather than to the aggregate conditions. In this way, the regulator can directly target the specific sector or borrower type.

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Short biography

Guangling Liu is a professor of economics at Stellenbosch University. He has a broad interest in macroeconomics, macro-finance, international finance and monetary economics. He has published a number of articles in respected macroeconomics and finance journals, such as the Journal of Banking and Finance, the International Review of Economics and Finance and Economic Modelling. He has taught macroeconomics, time series econometrics and mathematical economics at postgraduate level. He currently holds a research fellow position at the South African Reserve Bank. He is also the editor of the working papers of Economic Research Southern Africa. He obtained his PhD in economics from the University of Pretoria in 2008, prior to which he gained six years’ professional experience in financial markets. Before his appointment at Stellenbosch University in 2009, he had been a senior lecturer at the department of economics and econometrics at the University of Johannesburg in 2008.