Effectiveness of Lending Restrictions in European Countries: Expansion vs Recession

This paper estimates the dependence of the efficiency of the macroprudential lending restrictions on the state of the economy (expansion vs. recession) when the macroprudential policy shocks are implemented. The data of 18 European countries are used, the time span is 1990Q1-2018Q3. The Budnik and Kleibl database (2018) is applied for construction a macroprudential policy shock variable measured as the number of the implemented tightening lending restrictions minus the number of loosening restrictions. The method is the local projections with an incorporated logistic transition function to smooth the transition of the economy from one state to another. The responses of real credit and real house prices on the macroprudential shock of tightening lending restrictions are negative reaching -2.9 and -1.5 percentage points respectively over the projection horizon of 16 quarters based on the estimation of the baseline model without state-dependency. The next results are that the effectiveness of the implemented tightening (loosening) lending restrictions differs in times of recession and expansion having a stronger but more delayed effect in expansion (recession). In expansions, the responses are relatively delayed, but larger in size, whereas in recessions the effects are dampened by the end of the projection period. These results have a practical implication for the policymakers to adjust policy objectives and apply macroprudential lending restrictions effectively.