Calibrating Macroprudential Policy to Forecasts of Financial Stability
Abstract: The introduction of macroprudential responsibilities at central banks and financial regulatory agencies has created a need for new measures of financial stability. While many have been proposed, they usually require further transformation for use by policymakers. We propose a transformation based on transition probabilities between states of high and low financial stability. Forecasts of these state probabilities can then be used within a decision-theoretic framework to address the implementation of a countercyclical capital buffer, a common macroprudential policy. Our policy simulations suggest that given the low probability of a period of financial instability at year-end 2015, U.S. policymakers need not have engaged this capital buffer.
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Description: Full text
Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Paper Series
Publication Date: 2017-08-14
Pages: 42 pages