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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. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
  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.
  3. David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia & Elizabeth Martin & Nada Mora & Gabriel Sterne & Matthew Willison, 2009. "Funding Liquidity Risk in a Quantitative Model of Systemic Stability," Working Papers Central Bank of Chile 555, Central Bank of Chile.
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  7. Kilponen , Juha & Milne, Alistair, 2007. "The lending channel under optimal choice of monetary policy," Research Discussion Papers 33/2007, Bank of Finland.
  8. Allen, Franklin & Gale, Douglas, 2009. "Understanding Financial Crises," OUP Catalogue, Oxford University Press, number 9780199251421, March.
  9. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  10. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, April.
  11. Xavier Freixas, 2009. "Monetary policy in a systemic crisis," Oxford Review of Economic Policy, Oxford University Press, vol. 25(4), pages 630-653, Winter.
  12. John Muellbauer & Anthony Murphy, 2008. "Housing markets and the economy: the assessment," Oxford Review of Economic Policy, Oxford University Press, vol. 24(1), pages 1-33, spring.
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