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The global financial crisis (GFC) underscored the need for additional policy tools to safeguard financial stability and ultimately macroeconomic stability. Systemic financial vulnerabilities had developed under a seemingly tranquil macroeconomic surface of low inflation and small output gaps. This challenged the precrisis view that achieving these traditional policy targets was a sufficient condition for macroeconomic stability. Thus, new tools had to be deployed to target specific financial vulnerabilities and to build buffers to cushion adverse aggregate shocks, while allowing traditional policy levers, including monetary and microprudential policies to focus on their traditional roles. Macroprudential policy measures emerged as the solution to this gap. Some of these measures had been used before the GFC (mostly in emerging markets). But it was only after the crisis that they were more widely adopted, and the toolkit expanded. This spurred a growing body of empirical research on the effects and potential shortfalls of these measures, with a further deepening of this knowledge gaining importance as policymakers confront increased financial stability risks in the post-pandemic world. Recognizing that there still is much to learn, this paper takes stock of our expanding understanding about the effects (and side effects) of macroprudential measures by focusing on these questions: What have we learned about the effects of macroprudential policy in containing the buildup of vulnerabilities? What do we know about the effects on economic activity and resilience? How do policy effects vary with conditions and over time? How important are leakages and circumvention? How do the effects on credit depend on other policies?.

Monetary policy. --- Fiscal policy. --- macroprudential policy financial stability --- policy effect --- macroprudential effect --- macroprudential buffer --- macroprudential policy instruments --- countercyclical capital buffers --- bank credit --- United States

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This technical note on macroprudential policy framework and tools on France highlights that the institutional arrangements provide adequate powers to ensure Haut conseil de stabilité financière’s (HCSF) ability to act; however, some tools remain outside its legal domain. The report also discusses that The HCSF should evaluate effects of tools introduced to mitigate risks from corporate leverage. The HCSF should continue to monitor vulnerabilities in the corporate sector and once enough data is available, evaluate the impact on the tools introduced on: resilience of the financial system; and corporate borrowing behavior. A sectoral systemic risk buffer, calibrated to corporate exposures, could be considered if vulnerabilities intensify. A fiscal measure that incentivizes corporates to finance through equity rather than debt would affect both bank and market-based finance. Such a measure would have an impact on the demand for credit, rather than its supply. The macroprudential policy toolkit should be strengthened further.

Economic development. --- France. --- Economic development --- Economic policy --- Finance --- Finance: General --- Financial institutions --- Financial Instruments --- Financial Markets and the Macroeconomy --- Financial risk management --- Financial sector policy and analysis --- Financial sector stability --- Financial services industry --- General Financial Markets: Government Policy and Regulation --- Industries: Financial Services --- Institutional Investors --- Insurance companies --- Macroeconomics --- Macroprudential policy instruments --- Macroprudential policy --- Non-bank Financial Institutions --- Pension Funds --- Systemic risk --- France

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The global financial crisis (GFC) underscored the need for additional policy tools to safeguard financial stability and ultimately macroeconomic stability. Systemic financial vulnerabilities had developed under a seemingly tranquil macroeconomic surface of low inflation and small output gaps. This challenged the precrisis view that achieving these traditional policy targets was a sufficient condition for macroeconomic stability. Thus, new tools had to be deployed to target specific financial vulnerabilities and to build buffers to cushion adverse aggregate shocks, while allowing traditional policy levers, including monetary and microprudential policies to focus on their traditional roles. Macroprudential policy measures emerged as the solution to this gap. Some of these measures had been used before the GFC (mostly in emerging markets). But it was only after the crisis that they were more widely adopted, and the toolkit expanded. This spurred a growing body of empirical research on the effects and potential shortfalls of these measures, with a further deepening of this knowledge gaining importance as policymakers confront increased financial stability risks in the post-pandemic world. Recognizing that there still is much to learn, this paper takes stock of our expanding understanding about the effects (and side effects) of macroprudential measures by focusing on these questions: What have we learned about the effects of macroprudential policy in containing the buildup of vulnerabilities? What do we know about the effects on economic activity and resilience? How do policy effects vary with conditions and over time? How important are leakages and circumvention? How do the effects on credit depend on other policies?.

Monetary policy. --- Fiscal policy. --- macroprudential policy financial stability --- policy effect --- macroprudential effect --- macroprudential buffer --- macroprudential policy instruments --- countercyclical capital buffers --- bank credit --- Asset requirements --- Bank credit --- Banks and Banking --- Countercyclical capital buffers --- Credit --- Economic policy --- Economics --- Finance --- Finance: General --- Financial Institutions and Services: Government Policy and Regulation --- Financial Markets and the Macroeconomy --- Financial regulation and supervision --- Financial sector policy and analysis --- Financial services industry --- Financial services law & regulation --- General Financial Markets: Government Policy and Regulation --- International agencies --- International Agreements and Observance --- International Economics --- International institutions --- International organization --- International Organizations --- Macroeconomics --- Macroprudential policy instruments --- Macroprudential policy --- Monetary economics --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Money and Monetary Policy --- Money --- Political Economy --- Political economy --- Public Policy --- United States

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This paper examines the conceptual foundations of macroprudential policy by reviewing the literature on financial frictions from a policy perspective that systematically links state interventions to market failures. The method consists in gradually incorporating into the Arrow-Debreu world a variety of frictions and sources of aggregate volatility and combining them along three basic dimensions: purely idiosyncratic vs. aggregate volatility, full vs. bounded rationality, and internalized vs. uninternalized externalities. The analysis thereby obtains eight "domains," four of which include aggregate volatility, hence call for macroprudential policy variants grounded on largely orthogonal rationales. Two of them emerge even assuming that externalities are internalized: one aims at offsetting the public moral hazard implications of (efficient but time inconsistent) post-crisis policy interventions, the other at maintaining principal-agent incentives continuously aligned along the cycle. Allowing for uninternalized externalities justifies two additional types of macroprudential policy, one aimed at aligning private and social interests, the other at tempering mood swings. Choosing a proper regulatory path is complicated by the fact that the relevance of frictions is likely to be state-dependent and that different frictions motivate different (and often conflicting) policies.

Banks & Banking Reform --- Bounded rationality --- Collective action --- Debt Markets --- Economic Theory & Research --- Emerging Markets --- Externalities --- Financial crises --- Financial frictions --- Financial policy --- Labor Policies --- Macroeconomics and Economic Growth --- Macroprudential policy --- Principal-agent problems --- Pro-cyclical financial markets --- Prudential oversight --- Regulatory architecture

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This paper explores the conceptual foundations of macroprudential policy. It does so within a framework that gradually incorporates and interacts two types of frictions (principal-agent and collective action) with two forms of rationality (full and bounded), all in the context of aggregate volatility. Four largely orthogonal rationales for macroprudential policy are identified. The first (time consistency macroprudential) arises even in the absence of externalities, not to prevent financial crises but to offset the moral hazard implications of (efficient but time inconsistent) post-crisis policy interventions. The second (dynamic alignment macroprudential) protects the less sophisticated (boundedly rational) market participants by maintaining principal-agent incentives continuously aligned along the cycle and in the face of aggregate shocks. The third (collective action macroprudential) responds to the socially inefficient yet rational instability resulting from uninternalized externalities. The fourth (collective cognition macroprudential) aims at tempering non-rational mood swings where credit-constrained rational arbitrageurs fail. Finding the right policy balance is complicated by the fact that the four dimensions face policy trade-offs and their relative importance is state-dependent, hence shifts over time.

Banks & Banking Reform --- Bounded rationality --- Collective action --- Debt Markets --- Economic Theory & Research --- Emerging Markets --- Externalities --- Financial crises --- Financial frictions --- Financial policy --- Labor Policies --- Macroeconomics and Economic Growth --- Macroprudential policy --- Principal-agent problems --- Pro-cyclical financial markets --- Prudential oversight --- Regulatory architecture