Review of macroprudential instruments and frameworks

BIS has released a timely paper on the same:

Central banks will face a range of issues as macroprudential policy frameworks are developed and applied, because of central banks’ roles in financial stability, and because successful macroprudential policy can help stabilise the economy. But questions surround how macroprudential policy should be defined and how its instruments should be operated.

This report summarises a preliminary “stocktaking” by the Committee on the Global Financial System of issues and experience related to the design and implementation of macroprudential policy. The production of the report was overseen by a coordinating group led by Lex Hoogduin of the Dutch central bank. The report includes summary results from a survey of central banks on their conceptions of macroprudential policy and their use of macroprudential instruments, and from a central bank workshop on the use of macroprudential instruments relating to property lending markets, many of which have been applied in emerging economies.

There is an interesting table on page 16 which lists various macroprudential instruments. It then compares developed economies with emerging economies to see which one implemented these measures. Not surprisingly, developing economies are far ahead when it comes to implementing these measures. Well the reason is the caution shown by EME regulators after several rounds of crisis hit them and their peer group members.

What about RBI’s policies?

McCauley (2009) argued that emerging market central banks have been regular practitioners of macroprudential policy, without calling it by this name. As an example, he cited the Reserve Bank of India’s decision to raise the Basel I weights on mortgages and other household credit in 2005 (RBI (2005)).

As I said earlier, RBI needs to highlight these better.

There is an excellent literature review at the end on various aspects of macroprudential policy.

The literature review is divided into two main parts. The first reviews research on the concept of financial (in)stability and systemic risk, distinguishing work along the “time series” and the “cross-sectional” dimensions. The second part summarises research on individual macroprudential tools and on the interaction of macroprudential tools with other central bank functions, especially monetary policy. Throughout the review, parallels are drawn with the literature on monetary policy.

Infact, one has to reread this paper many times for its exhaustive coverage.