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Macro-prudential risk has become increasingly important - Goldman Sachs

FXStreet (Łódź) - According to the Goldman Sachs team of analysts, the global financial crisis has shown that financial stability and economic activity can be deeply affected by credit and house price corrections, therefore the use of macro-prudential policies is crucial for containing the financial imbalances in advance.

Key quotes

"Macro-prudential policy is aimed at building the resilience of the financial sector and preventing systemic financial instability. It works by changing the relative price of credit in different parts of the economy, so as to avoid a build-up of financial vulnerabilities in those sectors – such as the housing market – that are prone to excess."

"By nature, macro-prudential policy is therefore redistributive. As a result, it is subject to a ‘common pool’ problem: vested interests will seek to extract specific distributional benefits from such policies, without taking into account the systemic economy-wide implications of their behaviour."

"The greater political control over macroprudential policy, the greater the risk of such an outcome. Countries where ‘independent institutions’ set macro-prudential policy are therefore more likely to adopt the appropriate economy-wide stance than countries where macro-prudential policies are set by politicians."

"Within Europe, the Bank of England’s Financial Policy Committee (FPC) is closest to an ‘independent’ macro-prudential body. By contrast, in Scandinavia and Switzerland, macro-prudential policy is still largely determined by politicians. In the Euro area, while macro-prudential policies remain a national responsibility (and arrangements vary by country), the independent ECB has (via the SSM) some decision-making powers."

"The institutional set-up therefore suggests that – relative to Scandinavia and Switzerland – the UK is more likely to implement appropriate macroprudential policies. This implies that, over the medium term (as inflation and exchange rate concerns abate), an inadequate macro-prudential policy stance in Scandinavian and Switzerland will imply a greater need to address financial imbalances via monetary policy, and thus, all being equal, a more rapid pace of policy rate hikes than in the UK."

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