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Macroprudential policy: a case study from a tabletop exercise

Author

Listed:
  • Tobias Adrian
  • Patrick de Fontnouvelle
  • Emily Yang
  • Andrei Zlate

Abstract

Since the global financial crisis of 2007-09, policymakers and academics have advocated the use of prudential policy tools to reduce the risks that could inhibit the financial sector?s ability to intermediate credit. The use of such tools in the service of financial stability is often called macroprudential policy. This article describes a ?tabletop? exercise in which Federal Reserve Bank presidents were presented with a hypothetical scenario of overheating markets and asked to consider the effectiveness of macroprudential policy approaches in averting or moderating the financial disruptions that were likely to follow. The prudential tools examined as part of this exercise ranged from countercyclical capital buffers and sectoral capital requirements to liquidity requirements and leverage ratios, and from stress testing to supervisory guidance and moral suasion. In addition, participants were asked to consider the use of monetary policy tools to achieve financial stability ends. The participants found that implementation lags and a narrow scope of application limited the effectiveness of many prudential tools; the tools that posed the fewest implementation challenges, such as stress testing, margins on repo funding, and supervisory guidance, were the most favorably regarded. Interestingly, monetary policy emerged as an attractive supplemental tool for promoting financial stability. The tabletop exercise abstracted from governance issues within the Federal Reserve System, focusing instead on economic mechanisms of alternative tools.

Suggested Citation

  • Tobias Adrian & Patrick de Fontnouvelle & Emily Yang & Andrei Zlate, 2017. "Macroprudential policy: a case study from a tabletop exercise," Economic Policy Review, Federal Reserve Bank of New York, issue 23-1, pages 1-30.
  • Handle: RePEc:fip:fednep:00038
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    References listed on IDEAS

    as
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Monetary Policy and Financial Stability
      by Kim Schoenholtz in Money, Banking and Financial Markets on 2016-11-14 19:24:34

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    Cited by:

    1. Ricardo J. Caballero & Alp Simsek, 2019. "Prudential Monetary Policy," NBER Working Papers 25977, National Bureau of Economic Research, Inc.
    2. David Aikman & Jonathan Bridges & Anil Kashyap & Caspar Siegert, 2019. "Would Macroprudential Regulation Have Prevented the Last Crisis?," Journal of Economic Perspectives, American Economic Association, vol. 33(1), pages 107-130, Winter.
    3. François Gourio & Anil K. Kashyap & Jae W. Sim, 2018. "The Trade offs in Leaning Against the Wind," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(1), pages 70-115, March.
    4. Verona, Fabio & Martins, Manuel M.F. & Drumond, Inês, 2017. "Financial shocks, financial stability, and optimal Taylor rules," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 187-207.

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    More about this item

    Keywords

    macroprudential policy; financial stability; monetary policy; financial overheating; tabletop exercise;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises

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