Recent Trends in Macro-financial Policies: The Toolkit and Early Warnings

Abstract

Since the brewing up of the global financial crisis, macro-financial policies have entered the toolkit of macroeconomic policy makers in a big way. In particular, Central bankers all over the world have taken a keen interest in adopting macro-financial tools for containing systemic financial risks. In some sense the relationship between macro-financial policies and monetary policy is complementary in nature. In this backdrop this paper looks into four related issues: (a) meaning or understanding of what systemic risks mean; (b) measurement of financial linkage; and (c) policy tools for containing systemic risks; and (d) development of early warning exercise. Admittedly, identification of systemic risks are far more difficult than adopting traditional counter-cyclical stance of the standard monetary and fiscal policies. Nevertheless, in the days to come, the macroeconomic policymaker can afford to be oblivious to macro-financial policies only at their risk and peril.