Theterm “macro-prudential” has taken on new meanings in more recent years. In the late1990s, following the Asia crisis, the IMF focused more on the term and includedindicators for it in their Financial Sector Assessment Program (FSAP) reports.The sense appears to be for a need to monitor financial developments that mightlead to macroeconomic problems. A clearer definition of the macro-prudentialterm appears in Crockett (2000), who saw two strands to it: i) thepro-cyclicality of the financial cycle, which called for a build-up of cushionsin good times that could be run down in bad times (stabilisers); and ii)institutions having similar exposures being interconnected with each other,which calls for the calibration of prudential tools with respect to thesystemic importance of individual institutions.
Crockett sees the distinctionbetween macro- and micro-prudential not in terms of the type of instruments,but rather in “the objective of the tasks and the conception of the mechanismsinfluencing economic outcomes.” This seems a reasonable goal, but a decade orso later the FSB conceptualises it more narrowly. In its 2011 paper onmacro-prudential policy tools and frameworks the FSB defines macro prudential policyas one that “uses prudential tools to limit systemic or system-wide financialrisk” (FSB, 2011).Thisis precisely where the problems start. If prudential tools are to be used formicro and macro policy objectives then governance problems are going to becomeinevitable.
Worse still, there may be conflicts in policy objectives wherebygovernments are lured into the belief that if it is not politically popular toget internal and external balance fundamentals right, then somehow these policytools might be able to act as a way to square the circle. There are two broadstrands to these thoughts:?Monetary and fiscal policy failed to prevent the financial crisis at thesystemic level, so now they are to be augmented by some prudential tools in theexpectation that together they can succeed.?The financial crisis and policies to deal with it in advanced economies,including low rates and quantitative easing, have had spill-over effects inemerging market economies (EMEs), and it has become fashionable to believe thatperhaps capital controls can be used to resolve these problems.