Macro-prudential policy versus asset price bubbles in monetary union member states : the case of Spain

The paper considers the ability of macro-prudential instruments – top-down regulations applied on the financial system as a whole, aimed at slowing credit growth and decreasing systemic risk – to flatten a growing asset price bubble in a country not having independent monetary policy. This is problem is analyzed from the perspective of Spain – a eurozone member state, for which the common monetary policy turned out to be expansionary, and which introduced a macro-prudential tool, dynamic provisioning, in the previous decade. The paper analyses the factors that influenced the emergence of the bubble of the Spanish real estate market in the previous decade. It takes into account demand and supply factors, as well as discusses the ECB’s monetary policy in the context of Spain. Finally, it provides an overview of dynamic provisioning, the Spanish macro-prudential tool