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Brave New World? Macro-prudential policy and the new political economy of the federal reserve

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  • Lucy M. Goodhart

Abstract

The Financial Crisis that started in 2007 ushered in new responsibilities for central banks, particularly for what is termed 'macro-prudential policy', or MPP. The goal of this policy is to monitor and contain overall risk in the financial sector. Implementing MPP, however, carries the potential for distributional conflict with the largest financial firms and the politicization of central bank policy. In light of this risk, this essay analyses the institutional implications of MPP for a leading central bank, the US Federal Reserve. Specifically, how will MPP affect the autonomy of the Fed to set the policy it thinks right? The analysis is based on interviews with financial regulators, including Fed staffers and policymakers, and with journalists who report on financial regulation. It is also informed by a case study of the 'Volcker Revolution' in monetary policy. Based on these sources, I identify the factors that contributed to Fed autonomy in the conduct of monetary policy during the Volcker Revolution and assess the extent to which those same factors hold for MPP. I close with an assessment of what MPP means for the new political economy of the Fed in particular and developed world central banks more broadly.

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  • Lucy M. Goodhart, 2015. "Brave New World? Macro-prudential policy and the new political economy of the federal reserve," Review of International Political Economy, Taylor & Francis Journals, vol. 22(2), pages 280-310, April.
    • Handle: RePEc:taf:rripxx:v:22:y:2015:i:2:p:280-310
    DOI: 10.1080/09692290.2014.915578
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    References listed on IDEAS

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    1. Anat R. Admati & Peter M. Demarzo & Martin F. Hellwig & Paul Pfleiderer, 2018. "The Leverage Ratchet Effect," Journal of Finance, American Finance Association, vol. 73(1), pages 145-198, February.
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    3. Timberlake, Richard H., 1993. "Monetary Policy in the United States," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226803845, September.
    4. Anat Admati & Martin Hellwig, 2013. "The Bankers' New Clothes: What's Wrong with Banking and What to Do about It," Economics Books, Princeton University Press, edition 1, volume 1, number 9929.
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    Cited by:

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    2. Tim Marple, 2021. "The social management of complex uncertainty: Central Bank similarity and crisis liquidity swaps at the Federal Reserve," The Review of International Organizations, Springer, vol. 16(2), pages 377-401, April.
    3. Mabbett, Deborah & Schelkle, Waltraud, 2019. "Independent or lonely? Central banking in crisis," LSE Research Online Documents on Economics 90879, London School of Economics and Political Science, LSE Library.
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    5. Braun, Benjamin, 2016. "Speaking to the people? Money, trust, and central bank legitimacy in the age of quantitative easing," MPIfG Discussion Paper 16/12, Max Planck Institute for the Study of Societies.
    6. Franziska Bremus & Lukas Menkhoff, 2021. "Eigenkapitalpuffer im Abschwung wirksam? [Are Equity Buffers Effective During the Eonomic Downturn?]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 101(3), pages 207-212, March.
    7. Romain Plassard, 2020. "Making a Breach: The Incorporation of Agent-Based Models into the Bank of England's Toolkit," GREDEG Working Papers 2020-30, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    8. Lea Steininger & Casimir Hesse, 2024. "Buying into new ideas: The ECB’s evolving justification of unlimited liquidity," Department of Economics Working Papers wuwp357, Vienna University of Economics and Business, Department of Economics.
    9. Bengtsson, Elias, 2020. "Macroprudential policy in the EU: A political economy perspective," Global Finance Journal, Elsevier, vol. 46(C).

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