The Financial System Inquiry’s interim report recognised that the Reserve Bank and the Australian Prudential Regulatory Authority have considerable scope to manage risks to financial stability without greater reliance on so-called macro-prudential policies.
Macro-prudential policy instruments were part and parcel of the apparatus of financial repression used to regulate financial markets and credit allocation before deregulation, although often as permanent features of the financial system rather than counter-cyclical policies.
However, these instruments also implicate policymakers in making much finer judgements about risks to financial stability as well as the more traditional concern of monetary policy with price stability.
Policymakers have yet to establish how greater counter-cyclical use of quantitative controls over the supply and demand for credit based in part on macroeconomic conditions can be effectively reconciled with a more deregulated financial system in which financial market prices now play the dominate role in allocating capital.
In the wake of financial market deregulation, changes in official interest rates have been the main instrument through which authorities have sought to promote price stability and, at least indirectly, financial stability.
Macro-prudential policies are seen as providing policymakers with a more targeted set of policy instruments that might complement or even substitute for changes in official interest rates.
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