Macroprudential Policy: Resolution and Continued Challenges

Abstract

In this paper we address three issues; 1) The importance of knowing the exact damage caused by a failing firm, as that knowledge assists in creating more efficient policy responses. The failure of a large and complex financial firm, Lehman Brothers, experienced a very difficult and lengthy process in its resolution; the damage was much greater than expected, leading to a change in policies and specifically to a requirement for stress tests; 2) Macroprudential policies are very helpful as the can address issues in a specific sector, something that monetary policy is not designed for. This means that monetary policy designed to bring output and price stability, when combined with macroprudential tools, provides more financial stability; 3) Although macroprudential policies have stabilized the financial industry, some threats remain and therefore several threats are explored.