Calibrating Macroprudential Policy to Forecasts of Financial Stability

Scott Brave and Jose Lopez

No 2017-17, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: The introduction of macroprudential responsibilities at central banks and financial regulatory agencies has created a need for new measures of financial stability. While many have been proposed, they usually require further transformation for use by policymakers. We propose a transformation based on transition probabilities between states of high and low financial stability. Forecasts of these state probabilities can then be used within a decision-theoretic framework to address the implementation of a countercyclical capital buffer, a common macroprudential policy. Our policy simulations suggest that given the low probability of a period of financial instability at year-end 2015, U.S. policymakers need not have engaged this capital buffer.

Pages: 57 pages
Date: 2018-07-13
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
Note: The first version of this paper was published August 14, 2017.
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Citations: View citations in EconPapers (5)

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Journal Article: Calibrating Macroprudential Policy to Forecasts of Financial Stability (2019)
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DOI: 10.24148/wp2017-17

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