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Macroprudential policy: a case study from a tabletop exercise

Author

Listed:
  • Adrian, Tobias

    (International Monetary Fund)

  • de Fontnouvelle, Patrick

    () (Federal Reserve Bank of Boston)

  • Yang, Emily

    (Federal Reserve Bank of New York)

  • Zlate, Andrei

    (Federal Reserve Bank of Boston)

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

  • Adrian, Tobias & de Fontnouvelle, Patrick & Yang, Emily & Zlate, Andrei, 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

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    1. Beverly Hirtle & Til Schuermann & Kevin J. Stiroh, 2009. "Macroprudential supervision of financial institutions: lessons from the SCAP," Staff Reports 409, Federal Reserve Bank of New York.
    2. Boneva, Lena & Harrison, Richard & Waldron, Matt, 2015. "Threshold-based forward guidance: hedging the zero bound," Bank of England working papers 561, Bank of England.
    3. Akinci, Ozge & Olmstead-Rumsey, Jane, 2015. "How Effective are Macroprudential Policies? An Empirical Investigation," International Finance Discussion Papers 1136, Board of Governors of the Federal Reserve System (U.S.).
    4. Englund, Peter, 1999. "The Swedish Banking Crisis: Roots and Consequences," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 80-97, Autumn.
    5. G. L. Bach, 1949. "Bank Supervision, Monetary Policy, And Governmental Reorganization," Journal of Finance, American Finance Association, vol. 4(4), pages 269-285, December.
    6. Roland I. Robinson, 1950. "A New Supervisory View Of Bank Capital," Journal of Finance, American Finance Association, vol. 5(1), pages 95-109, March.
    7. Samuel G. Hanson & Anil K. Kashyap & Jeremy C. Stein, 2011. "A Macroprudential Approach to Financial Regulation," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 3-28, Winter.
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    Cited by:

    1. 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.
    2. 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.
    3. Aikman, David & Bridges, Jonathan & Kashyap, Anil & Siergert, Caspar, 2018. "Would macroprudential regulation have prevented the last crisis?," Bank of England working papers 747, Bank of England.

    More about this item

    Keywords

    financial stability; macroprudential policy; monetary policy; financial overheating; tabletop exercise;

    JEL classification:

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

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