This paper presents some tentative evidence that suggests that central banks, in particular, have yet to convince us that our understanding of the effectiveness of existing macroprudential strategies is sufficiently well advanced to be confident that we have reached a new normal that will ensure that financial crises are a thing of the past. Monetary policy before the global financial crisis was largely described via a policy rule that linked inflation and real economic developments to an interest rate under the control of a central bank. This paper shows that, in spite of the crisis, a version of the so-called Taylor rule remains a reasonably useful depiction of how the current stance of monetary policy is set. Turning to macroprudential frameworks, which are used to ensure financial system stability, especially since the global financial crisis, much less is known about their effectiveness. Accordingly, this paper considers whether some indicator of financial stability, as well as some institutional characteristics of the country or economy in question, increases the likelihood, as proxied by the value of the macroprudential index developed at CIGI, that one or more instruments will be deployed. The findings turn out to be highly sensitive, for example, to the exclusion of property prices. Indeed, gaps remain in the data that should be useful to gain a better understanding of the effectiveness of macroprudential policies. Therefore, we should be less confident that central banks have an adequate understanding of the transmission mechanism of macroprudential instruments.
Monetary Policy, Financial Stability and the Macroprudential Illusion?
CIGI Paper No. 165