Macroprudential policy –closing
the ﬁnancial stability gap
Stephan Fahr and John Fell
DG-Macroprudential Policy and Financial Stability, European Central Bank,
Frankfurt am Main, Germany
Purpose –The global ﬁnancial crisis demonstrated that monetary policy alone cannot ensure bothprice
and ﬁnancialstability. According to the Tinbergen (1952) rule, there was a gap in the policymakers’toolkitfor
safeguardingﬁnancial stability, as the number of available policy instruments was insufﬁcientrelative to the
number of policyobjectives. That gap is now being closed through the creationof new macroprudential policy
instruments. Both monetarypolicy and macroprudential policy have the capacity to inﬂuence both priceand
ﬁnancial stability objectives. This paper develops a framework for determining how best to assign
Design/methodology/approach –Using a simpliﬁed New-Keynesianmodel, the authors examine two
sets of policy trade-offs,the ﬁrst concerning the relative effectivenessof monetary and macroprudential policy
instrumentsin achieving price and ﬁnancial stability objectives andthe second concerning trade-offs between
macroprudentialpolicy instruments themselves.
Findings –This model shows that regardless of whether the objective is to enhance ﬁnancial system
resilienceor to moderate the ﬁnancialcycle, macroprudential policies aremore effective than monetary policy.
Likewise, monetary policy is more effective than macroprudential policy in achieving price stability.
According to the Mundell(1962) principle of effective market classiﬁcation,this implies that macroprudential
policy instruments should be paired with ﬁnancial stability objectives, and monetary policy instruments
should be paired with theprice stability objective. The authors also ﬁnd a trade-offbetween the two sets of
macroprudentialpolicy instruments, which indicates that failureto moderatethe ﬁnancial cycle would require
greater ﬁnancialsystem resilience.
Originality/value –The main contribution of the paper is to establish –with the help of a model
framework –the relative effectiveness of monetary and macroprudential policies in achieving price and
ﬁnancial stabilityobjectives. By so doing, it provides a rationalefor macroprudential policy and it shows how
macroprudentialpolicy can unburden monetary policyin leaning against the wind of ﬁnancial imbalances.
Keywords Financial stability, Monetary policy, Systemic risk, Macroprudential policy,
Policy assignment, Tinbergen rule
Paper type Research paper
1. Monetary policy and macroprudential policy: two distinct policy domains
for the macroeconomy
1.1 The ﬁnancial crisis has shown monetary policy to be insuﬃcient to ensure ﬁnancial
An important policy lesson of the global ﬁnancial crisis that erupted in 2008 was that the
attainment of price stability is insufﬁcient for ensuring ﬁnancial stability. The inordinately
large costs of the crisis challenged the “Jackson Hole consensus”, the prevailing orthodoxy
The views and opinions expressed in this article are those of the authors and do not necessarily
reﬂect those of the European Central Bank or its Governing Council. The authors would like to thank
Pablo Aguilar, Richard Barwell, Markus Behn, Frank Smets, Matija Lozej, Dirk Schoenmaker and
Frank Smets for fruitful discussions and comments.
Journalof Financial Regulation
Vol.25 No. 4, 2017
© Emerald Publishing Limited
The current issue and full text archive of this journal is available on Emerald Insight at: