Using growth-at-risk to assess the stance of macroprudential policy

The ultimate objective of macroprudential policy is to minimise the frequency and severity of economic losses arising from severe financial distress. Critically, any policymaker seeking to achieve this goal must be able to assess the stringency or laxity of their policy settings. Applying the lessons of monetary policy, we note that doing this requires a normative measure of policy stance based on a framework comprising an objective, tools, and a model linking the two. In this paper, we propose using growth-at-risk to define an overarching objective for macroprudential policy and then show how it can form the basis for a measure of policy stance. We proceed to discuss the challenges inherent in the implementation of our framework. These include the availability of appropriate data, choices among multiple tools, and gauging the uncertain responses of the economy and financial system to macroprudential policy actions.