Speaking at the IMF Spring Meeting event, “Rethinking macro policy III: progress or confusion?”, Shin offered some broader reflections on the limits of macroprudential tools and their relationship with monetary policy.
Both macroprudential policy and monetary policy influence the financial intermediation process and moderate the procyclicality of the financial system. They are similar in moderating the demand and supply of credit. They differ in two key respects, however. Macroprudential policy is directed at particular sectors and practices, and it is less susceptible to being undermined by global financial conditions. The evidence suggests that the two policies have been used in concert, pulling in the same direction rather than in opposite directions; there is a modest positive correlation of +0.2 between tighter macroprudential policy and tighter monetary policy. When they pull in opposite directions, firms and households are told simultaneously to borrow more and to borrow less. There is evidence that macroprudential policies have been effective in leaning against the credit cycle. However, the shifting patterns of financial intermediation mean that tools geared towards the regulated banking sector have diminishing efficacy. The term premium in deeply negative territory is one example of potential financial stability risks that are not amenable to traditional macroprudential tools.
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