Work

The paradox of macroprudential policy and sovereign risk

Year: 2025

Type: article

Abstract: This paper investigates the impact of macroprudential policy on sovereign risk. As long as macroprudential policy improves financial stability, it lowers sovereign risk and enables governments to increase spending without raising taxes. Consequently, countries with tighter macroprudential policies have lower primary budget balances and accumulate government debt over time. However, this effect diminishes or reverses when there is excessive regulation or high levels of debt. These findings are somewhat paradoxical: macroprudential policy may lower private debt, while increasing public debt.

Source: Journal of Financial Stability

DOI: 10.1016/j.jfs.2025.101411

Authors: António Afonso, André Teixeira

Institution: University of Lisbon

Language: English

Topic: Fiscal Policies and Political Economy

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,470

Funder: Fundação para a Ciência e a Tecnologia