Measuring the macroprudential policy stance in the euro area with a semi-structural model

Abstract

This article proposes a methodology for measuring the macroprudential policy stance based on a forward-looking distance-to-tail metric derived from a large-scale semi-structural model. The model reflects the dynamics of 89 significant euro area banks and 19 euro area economies and two endogenous amplification mechanisms: the real economy banking sector and solvency funding feedback loops. Our results reveal a slight tightening of the macroprudential policy stance from 2017 to the end of 2019 that partially stemmed from adjusting macroprudential capital buffers and the phase-in of other systemwide banking sector policies reflecting macroprudential intentions. This trend is abruptly interrupted at the onset of the Covid-19 pandemic, when pronounced macrofinancial uncertainty led to a substantial increase in tail risks and reappears in 2021. Our assessment also reveals a high degree of co-movement in macroprudential stances across the euro area countries.