Macroprudential policy and its relationship to monetary policy

Abstract

Macroprudential policy is aimed at reducing the systemic risks that develop or gain strength within the financial system and whose realisation would have serious r epercussions for the real economy. Successful macroprudential policy reduces the probability and potential severity of a financial crisis and thus promotes long-run economic growth. Macroprudential policy can increase the ability of the financial system to withstand a crisis eg by requiring financial institutions to maintain larger-than-normal capital and liquidity buffers during good times and allowing them to run them down when times are not so good. Having some common goals and transmission channels as well as occasionally being at odds provide a rationale for coordination of macroprudential and monetary policy.