The Unassuming Economist

From the IMF’s latest report on Korea:

“Evidence for Korea suggests that financial stability will not necessarily materialize as a natural by-product of a so-called appropriate monetary policy stance. Although the effects of monetary and macroprudential instruments may overlap, they are not perfect substitutes. Empirical evidence for Korea shows that macroprudential policy have made two active contributions to limit financial risks to the wider economy:

• Preempting aggregate weakness by limiting the buildup of risk, thereby reducing the occurrence of crises. Macroprudential policies can reduce the procyclical feedback between asset prices and credit.
• Reducing the systemic vulnerability by increasing the resilience of the financial system. By building buffers, macroprudential policy helps maintain the ability of the financial system to provide credit to the economy, even under adverse conditions.

Policymakers should be mindful that macroprudential policy is not free of costs and that there may be trade-offs between the stability and the efficiency of financial systems. For instance, when policymakers impose high capital and liquidity requirements on financial institutions, they may enhance the stability of the system, but they also drive up the price of credit. For macroprudential policy to contribute to financial stability and social welfare, its objectives need to be defined clearly and in a manner that can form the basis of a strong accountability framework.”