Macroprudential Tool Proliferation and its Adverse Effects on Macroeconomic Investment, Productivity, Growth and Employment

Abstract

Gazi Arif

This paper examines whether the proliferation of macroprudential tools deployed by central banks generates adverse macroeconomic consequences that offset their intended financial stability benefits. Drawing on a theoretical framework grounded in New Keynesian finance–macro models and a panel dataset covering 42 economies over the period 2000–2023, we document a robust, non-linear relationship between the breadth of macroprudential instrument use and key macroeconomic outcomes: gross fixed capital formation, total factor productivity (TFP), real GDP growth, and employment. Our results indicate that countries operating more than a moderate threshold of simultaneous macroprudential tools experience statistically significant reductions in private investment (1.8 to 3.2 percentage points of GDP), slower TFP growth (0.4 to 0.9 percentage points per annum), lower output growth (0.5 to 1.1 percentage points), and elevated unemployment (0.3–0.8 percentage points above baseline). The adverse effects are amplified in small open economies, countries with shallow financial markets, and periods of global financial tightening. We identify three principal transmission channels: credit supply compression, regulatory uncertainty rent extraction, and compliance cost diversion of managerial resources. Policy simulations suggest that a rationalized, targeted macroprudential framework— applying the minimum effective combination of instruments—dominates aggressive multi-tool regimes on both financial stability and macroeconomic welfare grounds. Our findings call for a fundamental reassessment of the “more-is-better” approach to macroprudential regulation.

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