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The financial crisis highlighted the importance of systemic risks and of policies that can be employed to prevent and mitigate them. Several recent initiatives aim at establishing institutional frameworks for macro-prudential policy. As this process advances further, substantial uncertainties remain regarding the transmission channels of macro-prudential instruments as well as the interactions with other policy functions, and monetary policy in particular. This paper provides an overview and some illustrative model simulations using an estimated DSGE model for the euro area of the macroeconomic interdependence between macro-prudential instruments and monetary policy.
International Monetary Fund. Monetary and Capital Markets Department
Author : International Monetary Fund. Monetary and Capital Markets Department Publisher : International Monetary Fund Page : 33 pages File Size : 39,81 MB Release : 2011-03-14 Category : Business & Economics ISBN : 1498339174
MCM conducted a survey in December 2010 to take stock of international experiences with financial stability and the evolving macroprudential policy framework. The survey was designed to seek information in three broad areas: the institutional setup for macroprudential policy, the analytical approach to systemic risk monitoring, and the macroprudential policy toolkit. The survey was sent to 63 countries and the European Central Bank (ECB), including all countries in the G-20 and those subject to mandatory Financial Sector Assessment Programs (FSAPs). The target list is designed to cover a broad range of jurisdictions in all regions, but more weight is given to economies that are systemically important (see Annex for details). The response rate is 80 percent. This note provides a summary of the survey’s main findings.
International Monetary Fund. Monetary and Capital Markets Department
Author : International Monetary Fund. Monetary and Capital Markets Department Publisher : International Monetary Fund Page : 68 pages File Size : 21,27 MB Release : 2012-12-27 Category : Business & Economics ISBN : 1498339514
This paper provides background material to support the Board paper on the interaction of monetary and macroprudential policies. It analyzes the scope for and evidence on interactions between monetary and macroprudential policies. It first reviews a recent conceptual literature on interactive effects that arise when both macroprudential and monetary policy are employed. It goes on to explore the “side effects” of monetary policy on financial stability and their implications for macroprudential policy. It finally addresses the strength of possible effects of macroprudential policies on output and price stability, and draws out implications for the conduct of monetary policy.
We explore optimal monetary and macroprudential policy rules for a small open economy. Delegating 'lean against the wind' squarely to macroprudential policy provides a more robust policy mix to shock uncertainty—(i) if macroprudential measures exist, there are no significant welfare gains from monetary policy reacting to credit growth under a financial shock; and (ii) monetary responses to financial markets could generate bigger welfare losses than macroprudential responses under different shocks. The source of outstanding liabilities also plays a role in the choice of policy instrument— macroprudential policies are particularly effective for emerging markets where foreign borrowing is sizeable.
This article explores the interactions between monetary policy and macroprudential policy. The starting point is that monetary policy and macroprudential policy pursue different primary objectives - price (and output) stability for monetary policy, and financial stability for macroprudential policy. Nonetheless, the conduct of each policy can have “side effects” on the objectives of the other (Figure 1). We argue that, in the presence of such side effects, effective monetary and macroprudential policies complement each other, yielding superior outcomes to a world where monetary policy - or macroprudential policy - is pursued on its own and in the absence of the other policy. In particular, we explore the following three arguments. First, monetary policy can have a range of “side effects” on financial stability. However, macroprudential policy can attenuate these side effects, providing more room for maneuver for monetary policy to pursue its primary objective. Second, the tightening of macroprudential policy tools can have dampening “side effects” on output. However, monetary policy can counter these effects, by adding accommodation at the margin, as long as monetary policy is effective. Third, macroprudential policy can build buffers that can be relaxed in periods of financial stress. Such a policy can help keep open the transmission of monetary policy, preserving the effectiveness of monetary policy in the event of such stress. For each of these three “interactions”, we also explore important empirical questions. Can macroprudential policy contain monetary side effects on financial stability effectively? How strong are the side effects of macroprudential policy on output? How effective is a relaxation of macroprudential buffers in periods of stress? This article draws on the results first reported in IMF (2013a) and IMF (2013b), and on further analysis conducted for this article on the effects of macroprudential measures for the sample of 36 countries over the period 2000-11 that was used in IMF (2013b).Full publication: "http://ssrn.com/abstract=2844203" Macroprudential Policy.
Macro-prudential policies aimed at mitigating systemic financial risks have become part of the policy toolkit in many emerging markets and some advanced countries. Their effectiveness and efficacy are not well-known, however. Using panel data regressions, we analyze how changes in balance sheets of some 2,800 banks in 48 countries over 2000–2010 respond to specific macro-prudential policies. Controlling for endogeneity, we find that measures aimed at borrowers––caps on debt-to-income and loan-to-value ratios––and at financial institutions––limits on credit growth and foreign currency lending––are effective in reducing asset growth. Countercyclical buffers are little effective through the cycle, and some measures are even counterproductive during downswings, serving to aggravate declines, consistent with the ex-ante nature of macro-prudential tools.
The countercyclical capital buffer (CCB) was proposed by the Basel committee to increase the resilience of the banking sector to negative shocks. The interactions between banking sector losses and the real economy highlight the importance of building a capital buffer in periods when systemic risks are rising. Basel III introduces a framework for a time-varying capital buffer on top of the minimum capital requirement and another time-invariant buffer (the conservation buffer). The CCB aims to make banks more resilient against imbalances in credit markets and thereby enhance medium-term prospects of the economy—in good times when system-wide risks are growing, the regulators could impose the CCB which would help the banks to withstand losses in bad times.
Macroprudential policies – caps on loan to value ratios, limits on credit growth and other balance sheets restrictions, (countercyclical) capital and reserve requirements and surcharges, and Pigouvian levies – have become part of the policy paradigm in emerging markets and advanced countries alike. But knowledge is still limited on these tools. Macroprudential policies ought to be motivated by market failures and externalities, but these can be hard to identify. They can also interact with various other policies, such as monetary and microprudential, raising coordination issues. Some countries, especially emerging markets, have used these tools and analyses suggest that some can reduce procyclicality and crisis risks. Yet, much remains to be studied, including tools’ costs ? by adversely affecting resource allocations; how to best adapt tools to country circumstances; and preferred institutional designs, including how to address political economy risks. As such, policy makers should move carefully in adopting tools.
The global financial crisis (GFC) underscored the need for additional policy tools to safeguard financial stability and ultimately macroeconomic stability. Systemic financial vulnerabilities had developed under a seemingly tranquil macroeconomic surface of low inflation and small output gaps. This challenged the precrisis view that achieving these traditional policy targets was a sufficient condition for macroeconomic stability. Thus, new tools had to be deployed to target specific financial vulnerabilities and to build buffers to cushion adverse aggregate shocks, while allowing traditional policy levers, including monetary and microprudential policies to focus on their traditional roles. Macroprudential policy measures emerged as the solution to this gap. Some of these measures had been used before the GFC (mostly in emerging markets). But it was only after the crisis that they were more widely adopted, and the toolkit expanded. This spurred a growing body of empirical research on the effects and potential shortfalls of these measures, with a further deepening of this knowledge gaining importance as policymakers confront increased financial stability risks in the post-pandemic world. Recognizing that there still is much to learn, this paper takes stock of our expanding understanding about the effects (and side effects) of macroprudential measures by focusing on these questions: What have we learned about the effects of macroprudential policy in containing the buildup of vulnerabilities? What do we know about the effects on economic activity and resilience? How do policy effects vary with conditions and over time? How important are leakages and circumvention? How do the effects on credit depend on other policies?