An Overview of Macroprudential Policy Tools

Abstract

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. JEL Classification Numbers: E43, E58, G18, G28

Fostering green investments and tackling climate-related financial risks: Which role for macroprudential policies?

“…In this section, we analyze the ongoing debate and discuss possible novel tools aimed at supporting the low-carbon transition while keeping the financial system "safe and sound". Additionally, we propose a classification of macroprudential tools (see Claessens, 2014;Cerutti et al, 2017, for more insights of the classification approaches of macroprudential instruments), as shown in Table 2. Furthermore, we discuss the challenges and implications deriving from their possible enforcement; we summarize the results of our analysis in Table 6 while additional details on the countries' implementation, policy's objective/s and juridical frameworks are available in (D'Orazio and .…”

“…Note that minimum credit floors and maximum credit ceilings were used much before the financial crisis as a classical instrument for credit policy. In post-crisis era time-varying Minimum credit floors and maximum credit ceilings they were classified as macroprudential instruments to be adjusted through the credit and leverage cycle (seeClaessens, 2014, for more details).…”

Macroprudential Policy in an Australian Context

“…Poor macroeconomic policy that causes imbalances in the economy should be addressed by fixing that policy, rather than by bringing another second‐best policy to the table. Rather than trying to develop a general theory of macroprudential policy, a more productive exercise is probably to use case studies where macroprudential policy has been tried in various countries at various times and understand the costs and benefits from actual examples (see Claessens ).…”

“…The evidence from a range of studies is that macroprudential policy, depending on the instruments used, does impact across countries and across time (see Claessens ). Intervention, such as restrictions on loan‐to‐valuation ratio, debt‐to‐income limits, credit ceilings, reserve requirements and dynamic provisioning, appear to limit pro‐cyclicality.…”

Introduction to the Policy Forum: Macroeconomic Consequences of Macroprudential Policies

“…A variety of other forms of macroprudential policies have been implemented globally (see Lim et al ; Claessens ). This diversity in part reflects differing goals of the policies due to where policy‐makers view the potential risks to financial stability arising.…”