Macroprudential Policies and the Lucas Critique
6 Pages Posted: 5 Oct 2016
Date Written: September 2016
The Lucas Critique provides a cautionary background for the implementation of new policies. Rational agents tend to anticipate the consequences of new policies and may adopt their behavior in ways that affect the effectiveness of policies. New financial regulation, which is moving from a microprudential to a macroprudential view of the world, is based on our experiences with past crises episodes and is in essence backward-looking. We argue that it may hence lead to unexpected outcomes when financial intermediaries change their behavior in response to a modified financial architecture. We discuss several areas in which such adjustment behavior is likely and derive suggestions for how macroprudential policies can be improved to limit such problems, as well as highlighting areas for further research.
Full publication: Macroprudential Policy
Suggested Citation: Suggested Citation