The view that central banks must play a greater role in preserving financial stability has gained considerable ground in the aftermath of the crisis and macroprudential policy has become a central pillar to deal with financial stability. The policy frame of macroprudential policy, its toolbox...

Policy discussions on the recent financial crisis feature widespread calls to address the pro-cyclical effects of regulation. The main concern is that the new risk-sensitive bank capital regulation (Basel II) may amplify business cycle fluctuations. This paper compares the leading alternative...