Evolving micro- and macroprudential regulations in the United States: A primer

The need for macropru policies is partly a reflection of the view that monetary policy has a reach that is too broad to be cost-effective for dealing with the kind of imbalances that led to the recent financial crisis (Blanchard et al., 2013). More specifically, higher monetary policy rates — not supported by higher inflationary expectations — may reduce aggregate output when not all sectors suffer the build-up of financial imbalances. Moreover, the policy rate may have too small and uncertain of an effect on the probability and/or severity of a financial crisis to match the substantial costs of tighter monetary policy (Svensson, 2015), particularly since monetary policy may have limited power in affecting credit supply (Romer and Romer, 1990) and lower policy rates may actually reduce asset price bubbles, rather than create or inflate them (Gali, 2014)…