Macroprudential Policies and the Lucas Critique

6 Pages Posted: 5 Oct 2016

See all articles by Bálint L. Horváth

Bálint L. Horváth

University of Bristol

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Date Written: September 2016

Abstract

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

Horváth, Bálint L. and Wagner, Wolf, Macroprudential Policies and the Lucas Critique (September 2016). BIS Paper No. 86f. Available at SSRN: https://ssrn.com/abstract=2844250

Bálint L. Horváth (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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