title: Empirical essays on monetary and macroprudential regulation
Creators: name: Ntwaepelo, Kaelo Mpho
Publisher: name: University of Reading
Year: 2023

description: This thesis presents three essays focusing on monetary and macroprudential regulation
in emerging economies. The first essay contributes to the discussion on the policy
trade-offs that exist when monetary and macroprudential policies are simultaneously
implemented to achieve macroeconomic stability. The second essay is a collaborative
research and evaluates the performance of the financial stress indices (FSIs) to provide
valuable information about the state of the economy. It assesses FSIs constructed
using advanced methods and simple averages. The final essay explores the effect of
increasing the deposit insurance coverage threshold, on bank stability and financial
development. It specifically uses the synthetic control method to examine the effects
of a generous deposit insurance scheme on bank stability and financial development.
The effects of macroprudential and monetary policy shocks in BRICS economies
This essay examines the macroeconomic effects of the macroprudential and monetary
policy shocks, in a framework where the policies have a dual mandate and target both
the price and financial stability objectives. I employ the two-step system generalised
method of moments (system-GMM) technique in a dynamic panel data model, over the
1990-2016 period. The essay uses the novel integrated macroprudential policy dataset
(iMaPP) in the context of the five major emerging market economies: Brazil, Russia,
India, China and South Africa (BRICS). The results indicate that a contractionary
monetary policy shock eliminates the excessive growth of credit and house prices
but increases the price levels. The increase in the price levels after a contractionary
monetary policy shock indicates that there is a trade-off between financial stability and
price stability objectives. Similarly, the impulse response function analysis reveals the
presence of a negative correlation between the financial variables and output, after a
contractionary macroprudential policy shock. Overall, the empirical findings suggest
that there is a policy conflict when the policies respond to additional objectives beyond
their primary targets. It is therefore beneficial for each policy to focus on its primary
objective while considering the spillover effects of the other policy in a coordinated
approach.
A search for the best financial stability surveillance tool: Performance evaluation of
financial stress indices
The essay aims to address the emerging debate about whether financial stress indices
(FSIs) constructed using advanced methods such as the dynamic factor model and
the principal component analysis method, perform better than those aggregated using
simple averages, for the case of South Africa. To do so, we construct three FSIs using:
the equal-variance weighting method (EVM), the principal component analysis method
(PCA) and the dynamic factor model (FAM). We compare the performance of the
indices for the period 2009-2020, using four criteria: quantile regressions, ordered
probit model, local projections and the autoregressive integrated moving average
(ARIMA) forecasting model. The results suggest that FSIs aggregated using the
dynamic factor model and the principal component analysis method have a significant
comparative advantage in predicting a financial crisis and capturing the vulnerability of
the South African financial system to external monetary policy shocks. This suggests
that the aggregation method and weighting system involved in constructing a financial
stress index affects its performance to monitor financial stability.
Bank stability versus Financial development: A generous deposit insurer’s dilemma
Using Brazil as a laboratory, this essay evaluates the effect of increasing the deposit
insurance coverage limit, on bank stability and financial development. It uses a
unique dataset that accounts for the multidimensional nature of financial development
by capturing accessibility, depth and efficiency in financial markets and institutions.
The empirical analysis utilises the synthetic control method to address the ambiguity
concerns of choosing a comparison unit. In addition to estimating the effect of
the policy interventions, the method creates an algorithm to identify a weighted
combination of countries that have similar characteristics to Brazil. The countries
are used as control units to set up a simulation that is reflective of the hypothetical
absence of the policy intervention. The results suggest that increasing the coverage
limit induces a trade-off between bank stability and financial development. More
specifically, a generous deposit insurance supports financial development at the cost
of bank stability, during the non-crisis period. However, in an economic crisis, the
stabilising effect of deposit insurance dominates the moral hazard effect.