Governance of macroprudential policy

K. Knot

Financial Stability Review, 2014, issue 18, 25-32

Abstract: This article proposes elements of a governance framework for macroprudential policy. First, a governance framework should be geared towards countering inaction. The difficulty of quantifying the final objective of financial stability and the large number of potential instruments blur the link between policy measures and their objective, making it harder to justify action. This creates a bias towards inaction that is strengthened by the fact that the benefits of macroprudential measures are invisible and uncertain and materialise only in the medium to long term, whereas they generally entail immediate costs for specific economic agents. Second, as this is a new policy area, authorities need sufficient discretion and flexibility to adapt to new insights and experiences. This flexibility should not, however, make authorities too passive or lead to too much uncertainty about authorities’ reaction function. Third, the governance framework needs strong accountability arrangements to ensure that the authority explains the reasons for its actions (or non-actions) and is held responsible for their consequences. We propose the use of constrained discretion, based on pre-specified indicators of systemic risk and a clearly communicated policy framework. This can address the inaction bias and increase the predictability and transparency of decision making, while giving authorities flexibility to deviate from pre-specified rules when appropriate.

Date: 2014
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Citations: View citations in EconPapers (6)

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