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What can (macro-)prudential policy do to support monetary policy?

  • Claudio Borio
  • Ilhyock Shim

In the economic environment that has been emerging over the last couple of decades, it is more likely that the occasional build-up of financial imbalances, typically in the form of unsustainable credit and asset price booms, will occur against the background of low and stable inflation, posing a potential threat to financial and macroeconomic stability. This means that the scope for monetary policy to lean against the build-up may be more constrained than in the past, when those imbalances would normally develop alongside rising inflation. This puts a premium on a strengthening of the macroprudential orientation of prudential frameworks, designed to restrain the build up of the imbalances and to make the financial system better able to withstand their unwinding. In this paper, we review the progress made in this direction in recent years. We conclude that there is now a much keener awareness of the importance of a macroprudential orientation but that progress in making it operational, while considerable, has been slower. The main obstacles are of an analytical and, above all, institutional/political economy nature. We suggest ways in which these obstacles could be addressed and underline the potential complementary role that adjustments in monetary policy frameworks could play.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 242.

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Length: 44 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:bis:biswps:242
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  1. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  2. Konstantinos Tsatsaronis, 2005. "Investigating the relationship between the financial and real economy," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 1-4 Bank for International Settlements.
  3. Bank for International Settlements, 2006. "The banking system in emerging economies: how much progress has been made?," BIS Papers, Bank for International Settlements, number 28, April.
  4. Philip Turner, 2006. "The banking system in emerging economies: how much progress has been made?," BIS Papers chapters, in: Bank for International Settlements (ed.), The banking system in emerging economies: how much progress has been made?, volume 28, pages 1-9 Bank for International Settlements.
  5. Bank for International Settlements, 2005. "Investigating the relationship between the financial and real economy," BIS Papers, Bank for International Settlements, number 22, April.
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