The global financial crisis put paid to the notion that financial shocks are benign most of the time and revived the idea that microprudential policies needed to be paired with macroprudential policies. These policy developments have been referred to as financial repression, in part because the pre-crisis belief that markets ought to be unfettered was being challenged. While restraints on the financial sector are largely welcome, it is worth considering whether the response to the fallout from the crisis is going too far. Arguably, lost in the discussion over financial reform is the need to balance the benefits and costs of financial liberalization versus financial repression. The paper highlights two weaknesses in current macroprudential policy strategies and presents some evidence of rising financial repression globally. First, a considerable emphasis has been placed on the content as opposed to the effectiveness of macroprudential frameworks. In addition, there is currently insufficient understanding of and experience with the global transmission of shocks that emanate from manipulating macroprudential instruments. Second, if macroprudential frameworks are increasingly used to reinforce economic sovereignty, this may threaten the transparency of the global financial system. Finally, empirical results that highlight the links between domestic institutions and the deployment of macroprudential instruments over the past decade are provided. Ultimately, the success and failure of any macroprudential framework must be evaluated by the strength and governance of domestic institutions that support its delivery.
Unpacking Macroprudential Policies: Strengths and Weaknesses
CIGI Paper No. 191