World Economic Forum in collaboration with VoxEU, 26 September 2018, by Björn Richter, Moritz Schularick, & Ilhyock Shim.

How do macroprudential policies interact with the core objectives of monetary policy, namely, output and price stability? As a response to the Global Crisis, central banks and regulators across the world have increasingly relied on macroprudential policies to maintain financial stability. A recent literature has shown that policymakers can moderate credit and asset price cycles using macroprudential instruments (e.g. Akinci and Olmstead-Rumsey 2018, Bruno et al. 2017, Kuttner and Shim 2016). This may allow negative output tail risks emanating from the link between excess credit and costly financial crises to be reduced (Schularick and Taylor 2012, Jordà et al. 2013). However, there is very little empirical evidence on how the use of such instruments affects the traditional objectives of monetary policy. This lack of evidence is in part a result of two empirical challenges that make identification and measurement difficult. In new research, we make inroads into addressing these two challenges (Richter et al. 2018). [….]

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