Financial instability and output in Vietnam: The asymmetric moderating effect of macroprudential policy across quantiles

Abstract This study investigates the moderating role of macroprudential policy on the relationship between financial instability and economic output across different quantiles of the Gross Domestic Product (GDP) distribution in Vietnam, utilizing quarterly time-series data from Q2/2008 to Q4/2022. Employing a quantile regression framework, the findings confirm that financial instability generally exerts a negative impact on economic output. More critically, the research reveals that macroprudential policy plays a significant and heterogeneous moderating role. During severe economic downturns, a tightening of macroprudential policy substantially dampens and even reverses the negative effect of financial instability on economic output. Conversely, during periods of strong economic expansion, this moderating effect inverts, with macroprudential policy tightening appearing to amplify the negative impact of concurrent financial instability. The isolated direct effect of macroprudential policy also demonstrates state-dependency. This research provides novel empirical evidence for Vietnam on these quantile-dependent, contrasting moderating effects, enhancing the theoretical understanding of macroprudential policy effectiveness as highly conditional on the prevailing economic state. The findings highlight the crucial need for dynamic calibration of macroprudential tools, particularly during strong economic expansions, potentially through targeted interventions and clear communication strategies to mitigate risks of amplifying adverse output effects from underlying financial instability.