Strengthening Financial Stability: Assessing the effectiveness of Macroprudential Policies in the Eurozone

In recent years, the recognition of the limitations inherent in a purely micro-prudential approach to regulation has led to a broader adoption of measures designed to mitigate systemic risks. This thesis evaluates the effectiveness of macroprudential policies in enhancing financial stability, with a particular focus on the Eurozone. It considers the impact of critical macroprudential tools such as loan-to-value (LTV) ratios and debt-to-income (DTI) ratios, exploring their influence on household credit demand and real house price dynamics. This analysis aims to provide a deeper understanding of how these tools contribute to safeguarding the financial system. The concept of financial stability express the resilience of the financial system to withstand shocks and avoid significant disruptions that impact the broader economy. Systemic risk, a central aspect of financial stability, refers to the risk of a breakdown in the financial system due to interconnections among financial institutions and markets. This thesis examines these concepts and discusses various macroprudential policy instruments designed to address both the time and cross-sectional dimensions of systemic risk. Using data from EU economies, this thesis analyzes the correlation between changes in different instruments and trends in household debt, as well as the relationship between these tools and real house price indices. This study provides empirical evidence that contribute to the broader discussion on the effectiveness of these policies in controlling credit growth and managing housing market fluctuations.