The International Aspects of Macroprudential Policy

37 Pages Posted: 17 Aug 2020

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: August 8, 2020

Abstract

Countries are using macroprudential tools more actively with the goal of improving the resilience of their broader financial systems. A growing body of evidence suggests that these tools can accomplish specific domestic goals and should reduce country vulnerability to many domestic and international shocks. The evidence also suggests, however, that these policies are not an elixir. They will not insulate economies from volatility and they generate leakages to the non-bank financial system and spillovers through international borrowing, lending and other cross-border exposures. Some of these unintended consequences can mitigate the effectiveness of macroprudential policies and generate new vulnerabilities and risks. The “Corona Crisis” provides a lens to evaluate the effectiveness of current macroprudential regulations during a period of extreme market volatility and economic stress. Experience to date suggests that macroprudential tools provide some benefits and should remain a focus of macroeconomic policy, but with realistic expectations about what they can accomplish.

Keywords: macroprudential, capital-flow measures, bank regulation, spillovers, Covid-19

Suggested Citation

Forbes, Kristin J., The International Aspects of Macroprudential Policy (August 8, 2020). MIT Sloan Research Paper No. 6167-20, Available at SSRN: https://ssrn.com/abstract=3672386 or http://dx.doi.org/10.2139/ssrn.3672386

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