Implementing Macroprudential Policies: Challenges, Pitfalls and Way Forward

Central banks have increasingly been given explicit financial stability mandates and as a result, macroprudential policies have become the buzz word in central bank and regulatory circles as well as in international financial institutions like the IMF and BIS. While macroprudential policies are a useful addition to the toolbox, there are various challenges that central banks and regulatory authorities would need to meet to obtain the intended outcomes. For example, there is a need to coordinate the use of macroprudential policies and traditional monetary policy so they complement each other in achieving desired policy objectives and outcomes. To overcome challenges and potential pitfalls, the implementation of macroprudential policies requires a disciplined and transparent process, in particular effective communication with the public. Transparency and clear communication are essential to instill public and market confidence and to promote accountability. Moreover, central bank implementation of macroprudential policy measures needs to be timely and decisive to curtail the build-up of systemic risks. Policy actions and discretion should be supported by clear legal authority and the same degree of autonomy and independence that pertains to monetary policy actions. Macroprudential policy decisions also need to be well-designed and supported by sound analysis, while avoiding “analytical paralysis,” since time is usually a factor in successfully controlling the build-up of systemic risk. The efficacy of macroprudential policy actions is difficult to prove as they remain largely a judgmental process, although experience will provide more empirical underpinnings to the macroprudential policy formulation process, and allow more granular data to assist researchers in this area. Regionally, it is useful to continue sharing experiences on macroprudential policy decision-making, and collaborate in related research.