Macroprudential Monetary Policy
59th Economic Conference
Periodic and increasingly severe U.S. financial crises and panics motivated Congress to create the Federal Reserve System in 1913. Despite the fact that financial crises and banking panics were key elements that deepened the severity of the Great Depression, in its aftermath Federal Reserve policymakers placed less importance on financial stability concerns. Reflecting on the period between 1984 and 2007, known as the Great Moderation, in his remarks at the 2013 NBER conference on the Fed's centenary, Ben S. Bernanke noted that "financial stability did not figure prominently in monetary policy discussions during these years." However, the recent global financial crisis has placed the issue of financial stability risk at the forefront of domestic and international monetary policy debates.
But how does, and how should, monetary policy address the risks, and the occasional reality, of an unstable financial system? When financial strains do develop, is conventional monetary policy, operating through short-term interest rates, too blunt an instrument to be effective? An alternative response to financial instability is to use more targeted macroprudential policies to help achieve the goals of monetary policy—a solution which implies that macroprudential policies should be included in the arsenal of monetary policy tools. Yet this additional policy instrument would represent a change in perspective, insofar as the post-crisis debate about macroprudential policy has, for the most part, stressed its supervisory role. Thus, we need to form a better understanding of how macroprudential supervision relates to the more traditional conduct of monetary policy. These considerations raise several important questions. How, and how much, should the Fed and other central banks react to an increase in the risk of financial instability? How do financial intermediary regulation and bank supervisory policies interact with monetary policy? What are the tradeoffs in using macroprudential policies to achieve the Fed's dual mandate? Finally, should financial stability be included as a third mandate for U.S. monetary policy?
Answering these questions will help central banks decide how they should react when the specific needs of supervisory and monetary policies conflict. Central to these issues is how we should think about implementing macroprudential policies. Should the supervisory authorities have the foremost responsibility, or should macroprudential policies be primarily considered as instruments of monetary policy? In the United States, this raises the specific question of whether macroprudential policy decisions should be made by the Federal Open Market Committee (FOMC). This conference will address such questions from both a domestic and an international perspective.
Presentations and full agenda available here.