Macroprudential Policy Activity and Financial Inclusion: Cross-country analysis of macroprudential tool use

Sammanfattning: Research suggests that multiple trade-offs and synergies characterise the relationship between financial inclusion and financial stability. For example, expanding access to financial services can lead to a more stable banking system but also excessive credit growth and decreased stability. The outcome is determined by policy and management and depends on institutional factors and other country characteristics. Recently, macroprudential policy (MaPP) has become the tool of choice for managing systemic risk. Other research has found that some MaPP tools lead to less uptake of formal financial services, while others are inherently exclusionary. This thesis argues that MaPP tools counteract financial inclusion goals in the short term. I propose a relationship in which commitments to inclusion increase the perceived costs of MaPP. Thus, risk build-up associated with tighter MaPP and financial inclusion would correlate negatively. This relationship entails that in the event of risks materialising, country financial sector ability to absorb shocks is lower as inclusion decreases. To study this, I analyse cross-country data on MaPP usage and financial inclusion, first to determine whether tool usage differs by inclusion quartile and second whether financial soundness indicators predict differing levels of macroprudential activity by quartile. There is little research on the determinants of MaPP usage. Therefore, this study presents a novel and exploratory approach. The findings indicate that policy activity and inclusion are positively correlated. However, results on the determinants of policy tightening are inconclusive. Therefore, the thesis concludes with the observation that further research on what determines policy activity is needed to narrow the knowledge gap between MaPP effectiveness and usage.