Economic Policy Review
Macroprudential Policy: A Case Study from a Tabletop Exercise
February 2017 Volume 23, Number 1
JEL classification: G18, E58, G01
Authors: Tobias Adrian, Patrick de Fontnouvelle, Emily Yang, and Andrei Zlate
Since the global financial crisis of 2007-09, policymakers and academics have advocated the use of prudential policy tools to reduce the risks that could inhibit the financial sector’s ability to intermediate credit. The use of such tools in the service of financial stability is often called macroprudential policy. This article describes a “tabletop” exercise in which Federal Reserve Bank presidents were presented with a hypothetical scenario of overheating markets and asked to consider the effectiveness of macroprudential policy approaches in averting or moderating the financial disruptions that were likely to follow. The prudential tools examined as part of this exercise ranged from countercyclical capital buffers and sectoral capital requirements to liquidity requirements and leverage ratios, and from stress testing to supervisory guidance and moral suasion. In addition, participants were asked to consider the use of monetary policy tools to achieve financial stability ends. The participants found that implementation lags and a narrow scope of application limited the effectiveness of many prudential tools; the tools that posed the fewest implementation challenges, such as stress testing, margins on repo funding, and supervisory guidance, were the most favorably regarded. Interestingly, monetary policy emerged as an attractive supplemental tool for promoting financial stability. The tabletop exercise abstracted from governance issues within the Federal Reserve System, focusing instead on economic mechanisms of alternative tools.