The Imprudence of Macroprudential Policy

Abstract

The literature on macroprudential policy suggests managing the systemic risk of the financial system as a whole is the best way to prevent financial crises. Unfortunately, this literature has not considered the problems of information- and incentive-compatibility that are the foundation of sound economics. The macroprudential policy literature also makes unfounded assumptions as to the stability of capitalist economies, and challenging these assumptions eliminates the case for its policy proposals in the first place. I show that the macroprudential policy literature is fundamentally incapable of delivering on its promises, and that true stability must come from sound monetary institutions rather than ad hoc interventions.

Keywords: Austrian business cycle theory, incentive problem, information, knowledge problem, macroprudential, monetary institutions, monetary policy, robust political economy

JEL Classification: E42, P1, B53