Macro-Prudential Policy and Systemic Risk: A Structural Approach

Abstract

The aim of this paper is to provide a structural review by analysing aspects of the relationship between prudential policy and systemic risk. It addresses the current research challenges associated with a lack of macro-prudential policy formalisation, guidance regarding its implementation and effectiveness measurement. Given the rising levels of interconnectedness between financial markets, the paper addresses the potential contagion or spill-over effects that foster change in systemic risk, especially in the case of market size differences. Finally, the paper discusses challenges associated with macro versus micro-prudential policy implementation, addressing difficulties in the measurement of systemic risk.