Macroprudential policy frameworks, instruments and indicators: a review
This paper reviews the recent literature on various aspects of macroprudential policymaking, covering: the use of indicators to guide such policies; policy tools and implementation; assessment of the effectiveness of the policies. In the light of the Great Financial Crisis, four key lessons emerge. Firstly, there is a clear need to put in place macroprudential frameworks. Secondly, measuring financial instability conditions requires a better understanding of financial cycle dynamics. More work is needed to model the empirical properties of the financial cycle. Capturing the interactions between systemic risk, market dynamics and policy choices, as well as spillovers is an area of policy where theoretical and empirical analysis can be developed further. These features also need to be considered when assessing the costs and benefits of macroprudential measures. Thirdly, macroprudential tools are too focused on banks. Changing patterns of financial intermediation call for greater attention to the actions of nonbank players. Lastly, quantitative models combining microand macro level data are required to analyse and calibrate macroprudential tools deployed, and to gauge their effectiveness.