Macroprudential Policy

A makroprudenciális politika a mindennapi gazdaságpolitikai döntések részévé vált mind a fejlett, mind a fejlődő államokban. A tematizáló, a szabványalkotó testületek és a nemzetközi pénzügyi intézmények, valamint az Európai Unió – illetve annak keretében a tagállamok is – kiemelt prioritásként kezelik a pénzügyi stabilitás helyreállítását és fenntartását, a makroprudenciális politika keretének és eszközrendszerének kialakításán keresztül. A tanulmány célja, hogy a makroprudenciális politika legjellemzőbb eszközeit csoportosítsa és feltárja alapvető hatásmechanizmusukat. Erre figyelemmel a tanulmány egyrészt meghatározza a makroprudenciális politika eszközeinek csoportosítási keretét, a másrészt összefoglalja a makroprudenciális politika köztes céljaira figyelemmel az egyes eszközöket, valamint a harmadrészt vizsgálja a makroprudenciális politika eszközeinek hatékonyságát.

В статті розглянута макропруденційна політика центральних банків, висвітлено алгоритм прийняття рішень щодо застосування макропруденційних інструментів та їх класифікація, пов’язаних із забезпеченням фінансової стабільності системи та окремих її елементів. Проаналізовано ефективність використання основних макропруденційних інструментів  в екстрополяції на пом’якшення проявів системного ризику. Визначено напрями взаємодії макропруденційної та грошово-кредитної політики.

közvetlen uniós szintű mikroprudenciális felügyelet jogi és egyben szervezeti kereteit alakította ki, amelyben az Európai Központi Bank és tagállami felügyeleti hatóságok szoros együttműködése biztosítja a hitelintézetek magas szintű felügyeletét. Az Egységes Felügyeleti Mechanizmus keretében a kizárólagos felügyeleti hatáskörök gyakorlása és végrehajtása, vagyis a decentralizáció a hitelintézet minősítésének a függvénye. A jelentős és a kevésbé jelentős felügyelt szervezeti jogállásról való hatósági típusú döntés jogkövetkezménye az Európai Központi Bank vagy a tagállami felügyeleti hatóság közvetlen felügyeleti jogköre alá való tartozás.

*Final Paper of Level 5 (UG 2nd year) module: Political Theory of Finance. Mark: 68 (high 2:1)*

Delegation of monetary authority to the central bank is perceived to be credible only when political independence is retained, preventing ‘political business cycle’ to influence monetary policy process. However, the rise of macro-prudentialism and central banks’ increasing use of unconventional monetary policies such as Quantitative Easing (QE) and Permanent Open Market Operations (POMO) worldwide following the 2008 financial crisis invited heated debate over the legitimacy of the power exercised by unelected central bankers, calling central banks to be subject to greater democratic accountability. This essay argues that central banks should be subject to more democratic accountability by incorporating precise rules of monetary policy within party manifestoes during general elections, so that central banks will be equipped with popular mandate to deliver monetary policies whilst their performance being checked by the intermediary of elected government. This essay commences as follows. Section I outlines the powers of central banks and present the current debates surrounding their monetary authority. Section II discusses whether political independence of central banks remains intact with democratic principles followed by reform proposal to improve democratic accountability of the central bank.

Standard market-based policies for addressing climate change mostly aim to internalize the Social Cost of Carbon (SCC) into the economy with either carbon taxes or cap-and-trade schemes. Standard policies are failing to manage the systemic risk of dangerous-to-catastrophic climate change for a variety of reasons. In this chapter we clarify and expand on a market hypothesis that argues for a second externalized cost of carbon, called the Risk Cost of Carbon (RCC), as the appropriate solution to this risk problem.

The combination of the SCC and RCC creates a new paradigm of complementary market pricing for the dual objectives of improving market efficiency and managing systemic risk, respectively. Introducing the RCC addresses the problem of how to decouple gross world product (GWP) from carbon emissions and how to solve the paradox of time discounting under systemic risk. Subsequently the RCC could have major implications for climate change economics, public policy, and sustainability theory. The hypothesis is novel by taking into consideration both the entropy and the mass of the carbon budget.

The RCC is technically defined as the cost of imposing risk tolerances (%) on climate mitigation objectives, and it has units of USD per tonne of carbon dioxide equivalent (CO2e) mitigated. The RCC is internalized with a “global carbon reward” that manages a trade-off between market efficiency and climate certainty. The carbon reward is issued as a parallel currency and with an exchange rate that is managed by central banks over a rolling 100-year planning horizon. A key recommendation is to test the hypothesis with experiments.

The aim of this thesis is to evaluate the conduct of macroprudential policies in an heterogenous monetary union, such as the Eurozone, by borrowing on the very recent theoretical and empirical developments of Dynamic Stochastic General Equilibrium (DSGE) models and Bayesian econometrics. We account for two main patterns of the Eurosystem: the business cycles divergence between core and peripheral countries and the globalization of banking and its spillovers when implementing macroprudential policies. As a main result, the implementation of macroprudential policy measures improves welfare at the global level. The highest welfare gains are observed when countries use multiple instruments and when macroprudential policy is implemented in a granular fashion. However, the conduct of macroprudential policy is not a free lunch for participating countries: in most situations, peripheral countries are winners while core countries record either smaller welfare gains or even welfare losses. In many policy experiments, we find that there exists an equilibrium that combines welfare increases at both the global and national levels for all participants but its enforceability requires a federal action, thus justifying the existence of a coordination mechanism such as the ESRB in the Eurozone. Finally, the possibility of banks to engage in cross border lending introduces an important spillover channel that tends to increase the welfare gains associated to macroprudential measures. Ignoring this phenomenon may lead to fallacious results in terms of the welfare ranking of alternative implementation schemes.

The Global Crisis and its aftermath led to greater use of stress tests and to the establishment of macroprudential policy as a new policy area. In this eBook ECB staff presents new suite of analytical tools that support the design and calibration of macroprudential policy. The tools go well beyond the requirements of the traditional solvency stress tests applied to banks, and include a broader set of institutions than just banks, an analysis of the financial cycle, as well as an assessment of systemic risk levels associated with the economic and financial shocks considered in adverse scenarios.

I argue the financialisation of the Australian economy has led to a cascading series of vulnerabilities in the Australian financial system. The vulnerabilities begin with the domination of banks in the financial system and the preponderance of the big four banks in the banking system. They are exacerbated by the weight of real estate in the balance sheets of the big four banks. Underpinning the whole edifice is the sharp rise in household debt. Ultimately, the fate of the Australian financial sector – and the fate of the share market and the wider economy – sits precariously on the precipice of over-inflated property markets and debt-ridden households. The debt-house-price-nexus in Australia is like a stretching rubber band. A stretched band can be relaxed gradually or it can be stretched further until, eventually, it breaks. The success of the Australian economy since the recession of the early 1990s, the profitability of the banks and the long-term rise in house prices has inevitability made investors and policy-makers complacent about risks.
Achieving the aim of a balanced financial system requires policy-makers to note the vulnerabilities building up in the Australian financial system and to work to reduce them over time. I argue, however, that financial policy-makers have underestimated the financial vulnerabilities building up in Australia as evidenced by the slow take-up of macroprudential policies and their complacent statements about growing risks. There are three reasons for this sanguine attitude: the policy predilection for idealised economic liberal regulation of the financial sector, Australia's overall growth performance and the profitability of the major Australian banks. Policy-makers appear to believe good fortune will continue indefinitely, but as good investment advisers always note: past performance is no guarantee of future returns. This is especially the case when the good times have gone on so long and "Minskyian” fragilities have built up within the property-finance nexus.

Since the recent global financial crisis was caused by the interaction of micro and macroelements, it has become imperative for regulatory policies to concentrate on covering these interactions if the likelihood of future crises is to reduce. In doing so, regulators must strike a balance between the micro-prudential and macroprudential dimensions of financial stability.

This paper examines the distinction between micro-prudential and macro-prudential
perspectives of financial regulation and supervision and why the macro-prudential
perspective needs to be strengthened. In view of the need for a market-wide perspective of risks, the concerns over financial innovation as well as concerns over the procyclicality of the financial system, this paper argues that strengthening the macro-prudential aspect could achieve both the micro and macro-prudential objectives of financial stability, that is, engender the protection of consumers and depositors’ funds and at the same time achieve system-wide stability.

The paper examines the boundaries or perimeters of prudential regulation and the tasks and tools of microprudential and macroprudential regulation and supervision, the former in limiting the failure of individual financial institutions and protecting stakeholders such as depositors and financial consumers, and the latter in limiting system-wide disruptions to the economy. Finally, this paper highlights the conflicts between micro-prudential and macroprudential regulation and the governance challenges faced by authorities in implementing a macro-prudential policy regime.

The great financial crisis has emphasized the importance of establishing macroprudential architectures to address problems of financial stability. Macroprudential authorities monitor the entire financial system and identify risks and vulnerabilities unlike micro prudential policies that do not incorporate endogenous risk. The adoption of macroprudential tools to mitigate systemic risk has become the norm in many financial markets. This paper covers a wide range of literature review of macroprudential policies from all around the world. Ultimately, it is evident that macroprudential regulation enables long term financial stability of an entire financial system not just an individual entity. In addition macroprudential policy instruments should be paired with financial stability objectives to be able to address the likelihood of systemic risk which is not factored in many institutions.

In an estimated DSGE model of the European Monetary Union that accounts for financial differences between core and peripheral countries, we find that country-adjusted macroprudential measures lead to significant welfare gains with respect to a uniform macroprudential policy rule that reacts to union-wide financial developments. However, peripheral countries are the winners from the implementation of macroprudential measures while core countries incur welfare losses, thus questioning the interest of adopting coordinated macroprudential measures with peripheral countries.

2007-09 küresel finansal krizinin ekonomiler üzerindeki olumsuz sonuçları, iktisat politikalarının finansal istikrarı sağlamadaki rollerinin ciddi biçimde sorgulanmasına neden olmuştur. Kriz ile birlikte, her bir politikanın nihai hedefine ulaştığı durumlarda dahi finansal istikrarın garanti olmadığının açık bir şekilde anlaşılması alternatif bir politika çerçevesine yönelik arayışları hızlandırmıştır. Bu doğrultuda sistemik riskleri kontrol altına almak, şoklara karşı finansal sistemin direncini güçlendirmek ve geleneksel politikaların etkinliğini arttırmak amacıyla -Türkiye’nin de aralarında bulunduğu- birçok ülke makro ihtiyati politikaların kullanımına başvurmuştur. Makro ihtiyati politikaların geçmişinin, içinde bulunduğumuz yüzyılın başlarına kadar uzanmasına karşın; yaygın kullanımının birkaç yıllık süreyi kapsaması ve araçların etkinliğine dair ampirik kanıtların yetersizliği, politikaların evrimsel sürecinde ağırlıklı olarak deneme-yanılma yönteminin kullanılmasına neden olmaktadır. Bu da makro ihtiyati politikalara ilişkin çalışmalara duyulan gereksinimi belirgin hale getirmektedir. Bu çerçevede çalışma ile makro ihtiyati politikaların ana hatlarının ortaya konulması ve politikaların tasarlanması ve yürütülmesi sürecinde dikkat edilmesi gereken noktaların vurgulanması amaçlanmıştır.

The policy framework on the countercyclical capital buffer (CCyB) and the capital conservation buffer (CCoB) is still in its early stages of implementation in the European Union (EU). Prior to the COVID-19 pandemic crisis, a general inaction bias prevailed among its Member States. The recent experience with emergency macroprudential relaxation measures in response to the pandemic shock highlighted the need for improved capital buffer usability. As the relevant framework heads towards a more mature phase, this paper discusses lessons learned from the use of buffers so far, recent findings regarding factors inhibiting their deployment and key suggestions on making the buffers fully usable in times of trouble, thus hoping to contribute to the macroprudential debate following the buffers' first stress event.

In recent years, policymakers and financial authorities have established an intricate, multi-level, framework for 'macro-prudential' policymaking in the European Union (EU). This paper argues that central banks have acted as a ‘third force’ in this process, determining the balance between national and supranational authority and ensuring their own predominance in the macro- prudential policy field. The paper demonstrates central banks’ influence during three phases in the creation of the new macro-prudential framework: the negotiations surrounding the establishment of the European Systemic Risk Board in 2008-10; the elaboration of a legal and organisational framework for the use of macro-prudential instruments in the banking sector in 2011-12; and the creation of the Single Supervisory Mechanism in 2012-14. The paper suggests that central banks’ influence has been supported by the confluence of structural, institutional and political factors, which favoured an expansion in central bank power after the financial crisis.

A few months ago, we produced a timetable for the implementation of U.S. financial reform under the Dodd-Frank Act.1 One of the main observations was that the legislation did little to consolidate regulation outside of banking. In contrast, the analogous UK reform legislation, the Financial Services Act, made the Bank of England (BoE) the center of UK financial and monetary stability. A 2016 amendment confirmed and strengthened the bank’s role.

However, a significant number of UK financial rules are based on European Union regulations, and currently, as a member of the single market, the UK is subject to them. That membership also has given Britain a voice in EU rule making through representation in both the European Parliament and the Council of Ministers. The UK implements EU rules either by transposing EU directives into British law or by directly enforcing EU regulations. These differences are important, especially as Britain and the EU prepare for the approaching Brexit: To maintain the current regulatory framework, the UK will have to transpose all the EU regulations into its national law. This is even more important now with the EU’s increased usage of regulations as the final stage of the Basel III accord’s implementation approaches. Furthermore, the EU’s regulatory framework itself is a work in progress, with key deadlines in 2018 and 2019. Forsaking EU membership will limit the UK’s ability to influence this process, although it may be obligated to follow the rules that result, because they are mostly driven by international regulatory efforts that include non-EU countries such as the U.S.

Before assessing these challenges, this paper establishes a timeline summarizing the status of financial regulatory reform in the UK. It then identifies some of the forthcoming difficulties, including Brexit and the recent evolution of macroprudential policies among developed countries

A pénzügyi rendszer szabályozási és felügyeleti politikájának alakítói és az akadémiai szféra képviselői között közmegegyezés alakult abban a tekintetben, hogy az intézményi kockázatokra fókuszáló mikroprudenciális szabályozás és felügyelet önmagában alkalmatlan a pénzügyi rendszer stabilitásának biztosítására, ezért kiemelt figyelmet kell fordítani a rendszerszintű kockázatok kezelését célzó makroprudenciális szabályozásra és felügyeletre. A makroprudenciális politika – alkalmazott politikaterületként – 2008 előtt nem is létezett, a fogalmi megalapozása, eszközrendszerének és más gazdaságpolitikai területekkel való kapcsolatrendszerének kialakítása jelenleg is folyamatban van. A tanulmány célja, hogy a makroprudenciális szabályozás és felügyelet – mint a gazdaságpolitika új területe – történeti és elméleti alapjait áttekintse, ennek megfelelően vizsgálja egyrészt a térhódításának okait, másrészt az alapvető fogalmi rendszerét, valamint harmadrészt a helyét a gazdaságpolitika rendszerében.

Since the 2007/8 global financial crisis, common factors such as low and protracted global interest rates may have sustained rising debt levels in emerging market and developing economies (EMDEs) like South Africa. This mini-dissertation attempts to characterise the South African financial cycle so as to determine the role of common global factors that potentially drive South African debt levels. First, the South African credit-to-GDP gap is constructed using the Hodrick-Prescott (HP) filter to determine the role of private sector credit frictions in generating domestic credit procyclicality. Next, a dynamic factor model is used to characterise the South African financial cycle with 13 macro-financial variables from 1980 to 2016. The South African financial cycle is then decomposed to determine the driving forces, and then compared to the Miranda-Aggripino and Rey (2018) global financial cycle and the VIX, to disentangle the effects of common global from idiosyncratic factors. The results reveal that the South African credit cycle is weakly countercyclical, suggesting the domestic business cycle may lead credit growth. Additionally, the South African financial cycle is driven mainly by common movements in the funding, credit, equity and global markets. Moreover, moderate positive co-movement with the global financial cycle, and stronger negative co-movement with the VIX, suggests the South African financial cycle is not isolated from common global factors. Therefore, we can infer that South African post-crisis debt growth may be a symptom of low and protracted global interest rates over the period. Based on these results, policymakers are advised to consider targeted macroprudential measures, such as balance sheet stress testing and macroprudential levies, to manage specific vulnerabilities.

We analyze the effects of borrower-based macroprudential policy at the household-level.
For identification, we exploit administrative Dutch tax-return and property data linked
to the universe of housing transactions, and an introduction of loan-to-value regula-
tion. The regulation reduces overall household leverage, with bunching in its limit. Ex-
ante more-affected households substantially reduce leverage and debt servicing costs.
Rather than buying cheaper homes or taking lightly-regulated loans, households con-
sume greater liquidity to satisfy the regulation. Improvements in household solvency
result in less financial distress and, given negative idiosyncratic shocks, better liquidity
management. However, fewer households transition from renting into ownership. These
effects are stronger among liquidity-constrained households.

The Bank of International Settlements (BIS) is known to be the ‘bank of central banks’ and a confidential place where central bankers meet to discuss policies. However, this contribution shows that it is also far more. Economic research and policy-making are closely connected within the BIS. Researchers and analysts provide knowledge for financial regulation and introduce new approaches to policy-makers who meet within the BIS-hosted bodies, such as the Basel Committee of Banking Supervision. The Monetary and Economic Department of the BIS operates like a think tank in the field of financial policy-making. This is exemplified by the introduction of macroprudential regulation, a new approach that originated within the BIS. By combining post-structural discourse theory with the concept of discourse coalition, this paper shows how macroprudential regulation became a frame of reference promising to maintain financial stability and how the BIS benefits from this.

In this paper, we analyze the implications of macroprudential and monetary policies for business cycles,
welfare, and financial stability. We consider a dynamic stochastic general equilibrium (DSGE) model with
housing and collateral constraints. A macroprudential rule for the loan-to-value ratio (LTV), which
responds to credit growth, interacts with a traditional Taylor rule for monetary policy. We compute
the optimal parameters of these rules both when monetary and macroprudential policies act in a coordinated
and in a non-coordinated way. We find that both policies acting together unambiguously
improves the stability of the system. In both cases, this interaction is welfare improving for the society,
especially in the case of the non-coordinated game. There is though a trade-off between borrowers and
savers. However, borrowers can compensate the saver’s welfare loss a la Kaldor–Hicks to achieve a Pareto-
superior outcome.

La stabilité financière constitue une des préoccupations majeures des Autorités monétaires de l’Union Monétaire Ouest Africaine (UMOA). Sa préservation nécessite la mise en œuvre d’une politique macroprudentielle efficace. À cet égard, la boîte à outils de la Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO) est composée des indicateurs de solidité financière (ISF) recommandés par le Fonds Monétaire International (FMI), les tests de résistance ou stress tests annuels et le dispositif applicable aux Etablissements Bancaires d’Importance Systémique (EBIS).
La présente étude se propose d’enrichir cette panoplie d’outils à travers la conception d’un modèle de réseau permettant de mesurer et de suivre les interconnexions au sein du système bancaire de l’UMOA ainsi que l’élaboration d’un indice de risque systémique et de contagion.
L’analyse a porté sur l’ensemble des banques de l’Union et couvre la période de 2007-2019. Les simulations effectuées ont permis d’identifier les établissements à fort risque de contagion en cas de chocs et ceux qui présentent une grande vulnérabilité du fait de leur forte dépendance des autres. Les résultats ont également mis en évidence des phénomènes de contagion pouvant aller au-delà des frontières nationales. Cependant, le risque de contagion est globalement faible dans la zone. Ces résultats contribuent à l’amélioration de la méthode d’identification des EBIS et, partant, au renforcement du cadre de surveillance de ces institutions. Ils ont permis de formuler des recommandations de politiques macroprudentielles.

Cet article évalue l’impact des prêts transfrontaliers sur les modalités de mise en oeuvre des mesures de politique macro-prudentielle dans la zone euro. L’objectif est d’apprécier – indépendamment de l’organisation institutionnelle actuelle - quel poids relatif il convient d’affecter aux considérations fédérales et nationales. L’analyse est menée dans le cadre d’un MEGIS à deux pays, prenant en compte le mécanisme d'accélérateur financier. Ce modèle est estimé à l'aide de l'économétrie bayesienne sur données européennes en séparant les pays du coeur de la zone des pays de la périphérie. Nos résultats montrent que la divergence des cycles réels et financiers entre les deux régions de l’union monétaire tient à la fois à l’hétérogénéité régionale des paramètres structurels et à celle des chocs subis qui apparaissent plus importants dans les pays de la périphérie. Pour ce qui concerne la mise en oeuvre de la politique macro-économique, le traitement hétérogène des pays conduit à une plus forte réaction de cet instrument dans les pays de la périphérie, ce qui affecte parfois de manière différente les performances macroéconomiques régionales. Enfin, une analyse contrefactuelle étudiant la réaction de l’activité et de l’investissement au moment de la crise montre que si globalement l’union monétaire (en moyenne) et les pays de la périphérie bénéficient de la mise en oeuvre de mesures macro prudentielles ; les pays du coeur voient au contraire leur situation se détériorer.

Confidence in combining inflation-targeting-cum-flexible-exchange-rate regimes with isolated microprudential regulation as a means to guarantee both macroeconomic and financial stability has been shattered by the scale and synchronization of the asset price booms and busts that preceded the global financial crisis. This note explores some of the ways in which monetary policy can address asset price booms and busts through its integration with macroprudential regulation.

Introduction of Loan-To-Value (LTV) ratio in 2012 by Bank Indonesia as part of macroprudential policy is expected to be an effective tool to prevent mortgage bubble that become primary cause of Global Financial Crisis (GFC) 2008 in United States. Since then, some changes have been made by Bank Indonesia in its LTV policy ratios to adjust with real estate market and economic condition. This paper is aimed to analyze the impact of LTV policy to Residential Property Price Index (RPPI) in Indonesia by using panel data analysis method. There are three important findings that can be obtained from this paper. First, LTV policy ratios are significantly affect the RPPI in general although each ratio shows different direction of impact. Secondly, given equal increase in all LTV policy ratios to loose LTV policy, this will lead to higher RPPI which indicate higher residential property demand, and vice versa. This is indication of LTV policy ability to direct real estate market towards Bank Indonesian objective. Third, the success of LTV policy as part of macroprudential policy is subject to the condition of other policy, particularly monetary policy in which opposite direction these two policies may offset each other. This paper is expected to be good evaluation for LTV policy effectiveness, particularly on its effect to direct the real estate market as well as to guide policy maker, particularly Bank Indonesia in policy mix process.

Microprudential regulation and supervision – focused on institutional risks – cannot guarantee the stability of the financial system. Therefore special attention should be paid to macroprudential regulation and supervision to address systemic risks. The purpose of this study is to provide the historical context and a theoretical framework for macroprudential regulation and supervision – a new area of economic policy. To this end, we shall examine the causes for the spread of macroprudential policy, its basic concepts, and thirdly, its place within the scheme of economic policies.

The 2008 financial crisis has emphasized the importance of macro financial linkages. In the financial sector, attention is
now focusing on macro prudential regulations that are geared toward the stability of the financial system as a whole. In
the macro arena, the recognition that price stability was not sufficient to guarantee macroeconomic stability and that
financial imbalances developed despite low inflation and small output gaps has highlighted the need for additional tools
(macro prudential policies) to complement monetary policy in countercyclical management. Emerging markets (EMs)
face different conditions and have key structural features that can have a bearing on the relevance and efficacy of policy
measures. Drawing on Canuto and Ghosh (2013), this note discusses the challenges of dealing with macro financial
linkages and explores the policy toolkit available for dealing with systemic risks, particularly in the context of EMs.

Macro-prudential measures implemented in individual Member States may have cross-border or cross-sectoral repercussions. This special feature discusses cross-border spillover channels. To limit negative spillover effects, macro-prudential instruments should be applied consistently across countries, and reciprocity agreements must be applied transparently. JEL Classification: G00

This paper reviews the political science literature on central banking from the early 1990s through the present, paying particular attention to the explicit or implicit conception of politics in the works reviewed. I begin by reviewing rationalist approaches to central bank independence from both the policy supply and demand sides. In the second section, I review literature that challenges and critiques this rationalist/institutionalist paradigm and its assumptions. The third section reviews studies that locate politics within central banks themselves and that analyze decision-making processes therein. The final section builds on the strengths of the existing literature to outline a future trajectory for political science scholarship on the global politics of central banking, one that incorporates a more sophisticated conception of politics and that is attentive to the post-crisis world in which transnational forces, governing ideas and worldviews, unconventional monetary policy, and non-monetary policy central bank functions are of paramount importance.

Why does the Federal Reserve govern finance in violation of a core principle of political liberalism, private gain–private loss? Turning capture theory on its head, this paper argues that the Fed bails out banks not because it is captured by financial interests, but by “systemic risk.” Systemic risk emerged in the mid-1960s as the byproduct of a jurisdictional struggle between two groups of experts, monetary substantivists and formalists, over the Fed. Initially, it was a tendency of money markets to produce liquidity crunches. Yet, formalists, taking over the Fed, built a governance regime around these markets and instituted an emergency lending program to protect this regime from bank failures. Although they invented the concept of “systemic risk” in the 1980s to negotiate their autonomy with stakeholders, this frame gradually turned into a paradigm through which central bankers think about, see, and act on financial disasters.

This paper introduces macroprudential policy using a static New Keynesian Macroeconomics model with financial frictions. We analyze two related questions: First, we show how the pro-cyclicality of financial factors captured by the financial accelerator amplifies the transmission of supply and demand shocks and impacts the intuition we get from a basic intermediate macroeconomics. Second, adopting an optimal policy perspective, we show how a policymaker may use macroprudential policy to complete monetary policy measures. Following the Mundellian Policy Assignment principle, macroprudential policy should be specialized to address the pro-cyclicality problem to suppress welfare losses associated with the building of financial imbalances, thus helping monetary policy to concentrate on the output inflation trade-off.

This paper aims at analysing whether the Central Bank of the Republic of Turkey (CBRT), designing a new monetary policy framework to achieve financial stability in the last quarter of 2010, tries to pursue financial stability by putting price stability on the back burner. To this end, a forward-looking reaction function that is extended with nominal exchange rate gap and nominal domestic credits gap is estimated for the CBRT. The paper first performs unit root and cointegration tests and finds that the variables become stationary at first differences and that there is a cointegration relationship among variables. Then, the paper conducts the Kalman filter to obtain time varying parameters. The findings show that the coefficients of all explanatory variables did not change too much after the new monetary policy framework of the CBRT in the last quarter of 2010. Therefore, this paper asserts that the CBRT continues to pursue price stability as its primary goal and tries to achieve fin...

With the introduction of macro prudential policies just recently,
trial and error method has been applied on the effectiveness of policy
instruments, which shows that there is a need for studies on macro
prudential policies. The aim of this study is to evaluate the effects of
macro prudential policies, which have been used since 2010 to ensure
financial stability, on the total credit volume of the Turkish banking
system. In this context, the total credit volume of the banking sector in
Turkey, monthly data on the frequency of the January 2011-December
2018 period was estimated by using VAR analysis.

After the global financial crisis of 2007, macroprudential policy instruments have gained in recognition as a crucial tool for enhancing financial stability. Monetary policy, fiscal policy, and microprudential policy operate with a different toolkit and focus on achieving goals other than the stability of the financial system as a whole. In light of this, a fourth policy-namely macroprudential policy-is required to mitigate and prevent shocks that could destabilize the financial system as a whole and compromise financial stability. The aim of this paper is to contrast macroprudential policy with other economic policies and explain why other economic policies are unable to attain financial stability, which in turn justifies the need for a separate macroprudential policy, the ultimate goal whereof is precisely financial stability of the financial system as a whole. Our research results

Macro-prudential thinking and its emphasis on endogenously created systemic risks, marginal in the banking regulation discourse until the mid-2000s, has become central post-crisis. This paper analyzes this intellectual shift by using  discourse and citation-network analysis of the most cited scholarly works on banking regulation and systemic risk from 1985-2014 and 6 in-depth interviews with central scholars. It demonstrates that the predominance of formalism, particularly partial equilibrium analysis, in studies on banking regulation pre-crisis impeded economists’ engagement with the endogenous sources of systemic risks discussed in the systemic risk sample. These studies excluded observed phenomena that could not be accommodated in mathematical models, largely ignoring contributions based on historical and practitioners’ styles of reasoning. Post-crisis, while informal analyses gain prominence in studies on banking regulation, attempts to conceptualize systemic risk as a negative externality indicate the persistence of formalism and equilibrium thinking and its concomitant epistemological limitations that stymie theoretical progress.

One of the principal tasks facing post-crash academic political economy is to analyse patterns of ideational change and the conditions that produce such change. What has been missing from the existing literature on ideational change at times of crises however, is a sense of how processes of persuasive struggle, and how the success of those ‘norm entrepreneurs’ arguing for ideational change is shaped by two contextual variables: the most immediate material symptoms and problems that a crisis displays (the variety of crisis); and the institutional character of the policy subsystem that agents have to operate within to affect change. Introducing these two variables into our accounts of persuasive struggle and ideational change enables us to deepen our understanding of the dynamics of ideational change at times of crisis. The article identifies that a quite rapid and radical intellectual change has been evident in the field of financial regulation in the form of an embrace of a macroprudential frame. In contrast in the field of macroeconomic policy - both monetary and fiscal policy, many pre-crash beliefs remain prominent, there is evidence of ideational stickiness and inertia, and despite some policy experimentation, overarching policy frameworks and their rationales have not been overhauled. The article applies Peter Hall’s framework of three orders of policy changes to help illuminate and explain the variation in patterns of change in the fields of financial regulation and macroeconomic policy since the financial crash of 2008. The different patterns of ideational change in macroeconomic policy and financial regulation in the post-crash period can be explained by timing and variety of crisis; sequencing of policy change; and institutional political differences between micro policy sub systems and macro policy systems.

"Could either monetary policy or financial prudential regulation be relied on individually to mitigate asset price cycles or their effects? If both ways are effective, monetary policy and prudential regulation could then be considered “substitutes,” in
the sense that the individual use of either instrument leads to a reduction in the volatility of both corresponding targets. This
note, however, argues in favor of complementarity—rather than substitution—in the use of monetary and macroprudential policies: the combined (articulate) use of both policies tends to be more effective than a standalone implementation of either."

The Bank of International Settlements (BIS) is known to be the ‘bank of central banks’ and a confidential place where central bankers meet to discuss policies. However, this contribution shows that it is also far more. Economic research and policy-making are closely connected within the BIS. Researchers and analysts provide knowledge for financial regulation and introduce new approaches to policy-makers who meet within the BIS-hosted bodies, such as the Basel Committee of Banking Supervision. The Monetary and Economic Department of the BIS operates like a think tank in the field of financial policy-making. This is exemplified by the introduction of macroprudential regulation, a new approach that originated within the BIS. By combining post-structural discourse theory with the concept of discourse coalition, this paper shows how macroprudential regulation became a frame of reference promising to maintain financial stability and how the BIS benefits from this.