The Interaction Between Domestic Monetary Policy and Macroprudential Policy in Israel

2025-08-09

AI Summary

This study examines the interaction between monetary and macroprudential policies in Israel from 2004 to 2019 and its effects on aggregate bank credit and its composition (housing, corporate, and consumer lending). Using bank-level panel data, the analysis employs event-study methodology and interaction-term regressions to identify dynamic, heterogeneous policy effects. Results show that macroprudential measures significantly curtail housing credit while boosting corporate lending, without altering overall credit growth. In contrast, accommodative monetary policy—when coordinated with macroprudential tools—substantially expands consumer credit and total credit, with this synergistic effect intensifying post-crisis. This paper provides the first empirical evidence of asymmetric complementarity between monetary and macroprudential policies in a small, advanced emerging economy. It contributes novel micro-level evidence and structural insights for optimal policy coordination, highlighting how policy interactions differentially shape credit allocation across sectors.

Technology Category

• Game Theory and Economic Paradigms: Coordination and Collaboration
• Natural Language Processing: Discourse, Pragmatics & Argument Mining
• Machine Learning: Mixture of Experts (MoE)

Application Category

• Security and Privacy: Privacy-enhancing technologies
• Semantics and Knowledge: Methods to enhance, augment, integrate or synergize semantic models such as knowledge graphs and LLMs
• User Modeling, Personalization and Recommendation: Practical large-scale studies of user experience

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.

Problem

• Examining interaction between monetary and macroprudential policies in Israel
• Assessing impact of macroprudential measures on bank credit composition
• Analyzing effects of monetary policy surprises on credit growth

Innovation

• Macroprudential policies alter bank credit composition
• Housing sector measures reduce housing credit growth
• Monetary policy interacts with macroprudential measures