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What Can (Macro-) Prudential Policy do to Support Monetary Policy?

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

Ilhyock Shim

Bank for International Settlements (BIS)

December 2007

BIS Working Paper No. 242

In the economic environment that has been emerging over the last couple of decades, it is more likely that the occasional build-up of financial imbalances, typically in the form of unsustainable credit and asset price booms, will occur against the background of low and stable inflation, posing a potential threat to financial and macroeconomic stability. This means that the scope for monetary policy to lean against the build-up may be more constrained than in the past, when those imbalances would normally develop alongside rising inflation. This puts a premium on a strengthening of the macroprudential orientation of prudential frameworks, designed to restrain the build up of the imbalances and to make the financial system better able to withstand their unwinding. In this paper, we review the progress made in this direction in recent years. We conclude that there is now a much keener awareness of the importance of a macroprudential orientation but that progress in making it operational, while considerable, has been slower. The main obstacles are of an analytical and, above all, institutional/political economy nature. We suggest ways in which these obstacles could be addressed and underline the potential complementary role that adjustments in monetary policy frameworks could play.

Number of Pages in PDF File: 44

Keywords: financial stability, price stability, financial imbalances, macroprudential, financial regulation and supervision, monetary policy

JEL Classification: E30, E44, E52, G20, G28

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Date posted: April 16, 2008  

Suggested Citation

Borio, Claudio E. V. and Shim, Ilhyock, What Can (Macro-) Prudential Policy do to Support Monetary Policy? (December 2007). BIS Working Paper No. 242. Available at SSRN: https://ssrn.com/abstract=1120287 or http://dx.doi.org/10.2139/ssrn.1120287

Contact Information

Claudio E.V. Borio (Contact Author)
Bank for International Settlements (BIS) - Research and Policy Analysis ( email )
CH-4002 Basel, Basel-Stadt
Ilhyock Shim
Bank for International Settlements (BIS) ( email )
78F, Two International Finance Centre
8 Finance Street, Central
Hong Kong, n/a n/a
Hong Kong
HOME PAGE: http://www.bis.org/author/ilhyock_shim.htm
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