Macroprudential Policy: A Case Study from a Tabletop Exercise

30 Pages Posted: 2 Mar 2017 Last revised: 16 Dec 2017

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Patrick de Fontnouvelle

Federal Reserve Bank of Boston - Supervision and Regulation

Emily Yang

Federal Reserve Bank of New York

Andrei Zlate

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: 2017

Abstract

Since the global financial crisis of 2007-09, policymakers and academics have advocated the use of prudential policy tools to reduce the risks that could inhibit the financial sector’s ability to intermediate credit. The use of such tools in the service of financial stability is often called macroprudential policy. This article describes a “tabletop” exercise in which Federal Reserve Bank presidents were presented with a hypothetical scenario of overheating markets and asked to consider the effectiveness of macroprudential policy approaches in averting or moderating the financial disruptions that were likely to follow. The prudential tools examined as part of this exercise ranged from countercyclical capital buffers and sectoral capital requirements to liquidity requirements and leverage ratios, and from stress testing to supervisory guidance and moral suasion. In addition, participants were asked to consider the use of monetary policy tools to achieve financial stability ends. The participants found that implementation lags and a narrow scope of application limited the effectiveness of many prudential tools; the tools that posed the fewest implementation challenges, such as stress testing, margins on repo funding, and supervisory guidance, were the most favorably regarded. Interestingly, monetary policy emerged as an attractive supplemental tool for promoting financial stability. The tabletop exercise abstracted from governance issues within the Federal Reserve System, focusing instead on economic mechanisms of alternative tools.

Keywords: financial stability, macroprudential policy, monetary policy, financial overheating, tabletop exercise

JEL Classification: E58, G01, G18

Suggested Citation

Adrian, Tobias and de Fontnouvelle, Patrick and Yang, Emily and Zlate, Andrei, Macroprudential Policy: A Case Study from a Tabletop Exercise (2017). Economic Policy Review, Issue 23-1, pp. 1-30, 2017. Available at SSRN: https://ssrn.com/abstract=2925707

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.tobiasadrian.com

Patrick De Fontnouvelle

Federal Reserve Bank of Boston - Supervision and Regulation ( email )

600 Atlantic Avenue
P.O. Box 2076
Boston, MA 02210
United States
617-973-3659 (Phone)
617-973-3219 (Fax)

Emily Yang

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Andrei Zlate

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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