Lessons we have learned from the crisis, by Jordi Galí
What is macroprudential policy?
“Now, as a result of the crisis, it seems a third branch is emerging, and the question is whether this third branch, which we usually call ‘macroprudential policy’, is here to stay, even in normal circumstances, or is more or less a temporary thing, a tool to be used until the recovery is on a firm footing. [...] I think this kind of policy is here to stay, because now we really see the need – the recent crisis has made this abundantly clear – to carefully monitor threats to financial stability.”
“Macroprudential policy doesn’t question the value of microprudential policy, which must continue to play a role, but it does seek to go a step further. It’s aimed at determining to what extent the activities of each financial institution – given the current macroeconomic circumstances, the behaviour of other financial institutions, and the connections that exist between them – to what extent these activities pose a potential risk to the financial stability of the country as a whole.”
“The problem arises when the activity of many banks, each of which on its own wouldn’t affect the system as a whole – when many banks engage in the same types of transactions: this endangers the entire financial system. This is what macroprudential policy should prevent.”