| Summary/Abstract |
We construct a connected network between China and the economies that are financially linked to it, based on the network topology of variance decompositions, and measure the cross-border contagion of financial risks among these economies. We then examine whether the concerted use of macroprudential policies mitigates the cross-border contagion of financial risks. The empirical results show that the tightening of macroprudential policies, especially counter-cyclical capital buffers and limits on credit growth, in economies with net spillover risk (e.g. the US and China), can reduce the cross-border spillover of domestic financial risks to other economies. The concerted use of macroprudential policies can contribute to global financial stability. However, the tightening of “capital” macroprudential policy tools will increase domestic cross-border absorption of financial risks. Hence, macroprudential regulation of cross-border capital flows must be strengthened.
|