Macroprudential Policy

This short course will start with a brief overview of the post-crisis reforms and focus on the gap that macroprudential policy was meant to fill: the lack of a system-wide perspective on financial stability. It will explore the conceptual and practical difficulties in defining financial stability and setting an operational target for policy; provide a high-level overview of the tools for monitoring systemic risk, including stress tests, as well as of the various macroprudential policy instruments available to mitigate it; and discuss the governance challenges in setting up an institutional framework for macroprudential policy. The course will review how the major advanced economies (US, UK, Euro area) have tackled these issues, as well as discuss aspects of macroprudential policy specific to emerging market (EM) and developing countries. Lastly, the course will examine recent and emerging challenges to financial stability, such as the COVID-19 pandemic, cyber risk, and the transition to a low-carbon economy; discuss the experience so far with macroprudential policy responses to these challenges; and assess the adequacy of the existing tools to address them. This course will have a practical focus, emphasizing the perspective and actual experience of policymakers. By the end of this course, students should have a good understanding of the concepts of financial stability and systemic risk and their measurement, as well as how they are applied in the real world; the difference between the micro- and macro-prudential approach to financial regulation; the architecture and working of macroprudential policy in a variety of country circumstances; the role of central banks and the associated political economy challenges; and emerging risks to financial stability. Students will be encouraged, including through class discussions and assignments, to approach these issues from the standpoint of policymakers.