Brave new world? Macro prudential policy and the new political economy of The Federal Reserve

Lucy Goodhart

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The Financial Crisis that started in 2007 ushered in new responsibilities for central banks, particularly for what is termed “macro-prudential policy,” or MPP. The goal of this policy is to monitor and contain overall risk in the financial sector. Implementing MPP, however, carries the potential for distributional conflict with the largest financial firms and the politicization of central bank policy. In light of this risk, this essay analyses the institutional implications of MPP for a leading central bank, the U.S. Federal Reserve. Specifically, how will MPP affect the autonomy of the Fed to set the policy it thinks right? The analysis is based on interviews with financial regulators, including Fed staffers and policymakers, and with journalists who report on financial regulation. It is also informed by a case study of the “Volcker Revolution” in monetary policy. Based on these sources, I identify the factors that contributed to Fed autonomy in the conduct of monetary policy during the Volcker Revolution and assess the extent to which those same factors hold for MPP. I close with an assessment of what MPP means for the new political economy of the Fed in particular and developed world central banks more broadly.

Keywords: Sovereign Default; Debt Crises; Political Survival; Networks; Voter Behavior. (search for similar items in EconPapers)
JEL-codes: G00 R21 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2015-01-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:60952

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