IEG: The Role of Macro-Prudential Policy in the Policy Framework

Macroprudential intervention is a new weapon for policymakers, aiming to maintain stability in the financial system. It is intended to manage risks caused by asset bubbles, excessive concentration of risk, or risks in linkages in the financial system.

Uncertainty abounds about how the new system of regulation will work, and how effective it will be as the UK leads the way in their use. IEG identified the risks as follows:

Potential conflict with other policy initiatives (eg monetary, fiscal, microprudential)

Timing

  • how will regulators identify problems in a timely way?
  • how quickly will a given measure take effect?


Impact

  • monetary policy levers are well understood - how will policymakers
  • correctly calibrate the likely effect of macroprudential policies?
  • will policies be used symmetrically, and will the impact be symmetrical?
  • global nature of financial markets complicates the picture, suggesting need for global coordination
  • will financial innovation outpace macroprudential capabilities?


IEG concluded macroprudential policy had excellent potential, but was inevitably going to be experimental in its execution, which posed risks for the economy.