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Macroprudential policy: what can it achieve?

  • Alistair Milne

This paper examines both the objectives and the available instruments for new macroprudential policy-making bodies. It argues that the objective--financial stability--is best understood as avoiding widespread disruption of financial flows. Achieving this objective requires that policy-makers carry out two different but related tasks. First they must ensure the resilience of the financial system to external shocks. Second they must respond in a timely fashion to future unsustainable expansions of credit and growth of asset prices. These are old policy challenges. What has changed is the emergence of new vulnerabilities in our innovative and relatively lightly controlled financial system, exposed by the recent global financial crisis. Macroprudential policy can be effective in addressing these vulnerabilities but will not remove the major political and institutional obstacles to the effective control of unsustainable credit expansions. Copyright 2009, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/oxrep/grp036
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Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

Volume (Year): 25 (2009)
Issue (Month): 4 (Winter)
Pages: 608-629

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Handle: RePEc:oup:oxford:v:25:y:2009:i:4:p:608-629
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  1. Xavier Freixas, 2009. "Monetary policy in a systemic crisis," Economics Working Papers 1200, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 2033-2060, June.
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