Morning Must-Read: Dirk Schoenmaker: Macroprudentialism

…with new instruments, central banks need to learn how to use them. This will not be easy since the exact effect depends on the specifics of a country’s financial system and there may be unintended consequences…. Macroprudential policy, just like monetary policy, is more art than science…. The high costs of financial crises suggest that it may be better to err on the side of a pro-active macroprudential policy stance….

Macroprudential policy requires complete independence from short-term political pressures to deal with the inherent conflict between the short and the long term. This is why independent agencies, such as the central bank or the financial supervisory authority, are made responsible for macroprudential policy. This requires adequate arrangements for democratic accountability, as macroprudential decisions, such as lowering the loan-to-value ratio, can have a major impact on citizens.