Macro-Financial Stability Frameworks: Experience and Challenges

Since the 2008–2009 Great Financial Crisis, major advanced economies (AEs) have used monetary and macroprudential policies to achieve macroeconomic and financial stability. Emerging market economies (EMEs) have, in addition, combined interest rate tools with FX intervention, macroprudential policy and, sometimes, capital flow management measures (CFMs) to address the challenges from capital flow and exchange rate volatility. This chapter provides an overview of the use of monetary, macroprudential and exchange rate policies, sometimes alongside CFMs, both in AEs and EMEs. It also assesses the extent to which the use of these policies constitutes a holistic macro-financial stability framework (MFSF). We reach three conclusions. First, combining tools has succeeded in improving policy tradeoffs. In particular, EMEs have benefited from the joint use of the various policies to mitigate the risks for domestic stability arising from external influences. Second, a holistic MFSF is still a work in progress: a number of challenges remain. Finally, more efforts need to be made to better understand the channels of international spillovers and spillbacks.