Evaluating the Net Benefits of Macroprudential Policy: A Cookbook

Abstract

The paper proposes a simple, new, analytical framework for assessing the cost and benefits of macroprudential policies. It proposes a measure of net benefits in terms of parameters that can be estimated: the probability of crisis, the loss in output given crisis, policy effectiveness in bringing down both the probability and damage during crisis, and the output-cost of a policy decision. It discusses three types of policy leakages and identifies instruments that could best minimize the leakages. Some rules of thumb for policymakers are provided.

Keywords: Macroprudential Policy, Financial sector, Financial risk, Financial crisis, Risk management, banking, Cost and Benefits, Policy Effectiveness, banking crisis, banking sector, banking system, reserve requirement, banking crises, bank credit, bank of england, bank branches, bank capital, banking supervision, capital requirement, bank for international settlements, bank liquidations, foreign asset, systemic banking crisis, bank runs, bank liquidity, mortgage lending, banking activities, banking policy, banking systems, probability of default, return on equity, banks ? loan, national bank, bank distress, bank restructuring, monetary authority, bank finance, bank capitalization, central banking,

JEL Classification: E58, G01, G28