Macroprudential Policy : Implementation, Effects, and Lessons

In this paper I review the development of macroprudential policy (MPP) and, in particular, its regulatory structure, its influence on the financial system, and its costs and benefits. I find that the effectiveness of MPP depends on the institutional setup in which it is implemented: often, MPP is under the responsibility of the central bank, due to its independence, expertise and incentives to take action. However, this setup may generate conflicts between MPP and traditional monetary policy. I also discuss another issue undermining the effectiveness of MPP, namely, “leakages,” i.e. migrations of financial activity to institutions beyond the scope of application and enforcement of the MPP tool. Based on the Israeli experience of implementing MPP, I argue that coordination between the regulatory authorities supervising different sectors of the financial system is crucial for the successful implementation of MPP