The Interaction Between Domestic Monetary Policy and Macroprudential Policy in Israel

TL;DR

This paper examines how Israel's domestic monetary and macroprudential policies interacted from 2004 to 2019, revealing their effects on credit composition and growth during and before the global financial crisis.

Contribution

It provides new empirical evidence on the interaction effects between monetary and macroprudential policies on credit dynamics in Israel.

Findings

Macroprudential measures affected credit composition but not total growth.

Housing macroprudential measures moderated housing credit growth.

Monetary policy surprises increased credit, especially when combined with macroprudential measures.

Abstract

The global financial crisis (GFC) triggered the use of macroprudential policies imposed on the banking sector. Using bank-level panel data for Israel for the period 2004-2019, we find that domestic macroprudential measures changed the composition of bank credit growth but did not affect the total credit growth rate. Specifically, we show that macroprudential measures targeted at the housing sector moderated housing credit growth but tended to increase business credit growth. We also find that accommodative monetary policy surprises tended to increase bank credit growth before the GFC. We show that accommodative monetary policy surprises increased consumer credit when interacting with macroprudential policies targeting the housing market. Accommodative monetary policy interacted with nonhousing macroprudential measures to increase total credit.