The Effectiveness of Macroprudential Policy Coordination in Managing Financial Risk in Systemic Economies

In an increasingly integrated global financial system, the effectiveness of macroprudential policy is shaped not only by domestic conditions but also by cross-border spillovers and regulatory interactions. Financial integration enables institutions to circumvent national regulations through regulatory arbitrage, while shocks are rapidly transmitted across economies via capital flows and interconnected financial markets. In response, countries often adopt inward-looking macroprudential measures to shield domestic systems; however, without coordination, such policies can generate offsetting effects, amplify volatility, and, in extreme cases, lead to regulatory conflicts. This has led to growing calls for cross-country macroprudential policy coordination, though its relative effectiveness compared to country-specific approaches remains an open empirical question. This study evaluates the relative effectiveness of coordinated and country-specific macroprudential policies in advanced systemic economies (ASEs) and systemic middle-income countries (SMICs), which collectively dominate global output and financial activity and generate substantial international spillovers. Despite extensive theoretical support for coordination, the empirical literature remains fragmented, with studies typically examining either coordination or domestic policies in isolation. To address this gap, the study develops a novel proxy for macroprudential policy coordination based on the co-movement of national policy indices and integrates it with country-specific measures within a unified empirical framework. Using a Dynamic Common Correlated Effects model and a Panel Structural Vector Autoregression model, the study examines the impact and transmission of both policy types on capital flows, credit growth, and property prices. The findings indicate that both coordinated and domestic macroprudential policies generate cross-country effects, particularly through capital flow reallocation. However, important trade-offs emerge. While domestic policies are effective in curbing excessive credit and housing market growth, coordinated policies tend to support expansion in these sectors. These results highlight that neither approach is universally superior. Instead, an optimal policy framework requires balancing country-specific flexibility with cross-country coordination to mitigate spillovers and enhance global financial stability.