Managing the Risks of the New Macro-Prudential Policy Regime

By Charles W. Calomiris

The pursuit of a new “macro-prudential” policy agenda has become a call to arms for many central banks and multilateral institutions. But it should only be employed during extreme circumstances. In general, policy makers should continue to rely on traditional monetary policy.

Many observers argue that the recent financial crisis shows that the aggressive pursuit of macro-prudential policies – policies that vary bank capital requirements, mortgage leverage constraints, and other instruments on a cyclical base to cool down or heat up the financial system as needed – are necessary to combat the cycles of financial boom and bust that have characterized developed and developing economies over the past three decades.