The limits of macropru

Are today’s macroprudential regimes sufficiently well-equipped to do this? We argue the U.S. FSOC is not set-up for this purpose. It has no macroprudential levers under its direct control, and not all its members have mandates to protect financial stability. A macroprudential regulator modelled on the U.K.’s FPC would have the necessary mandate and powers. But given the role played by loosely-regulated non-bank financial institutions prior to the crisis, to be successful, an FPC-type regime in the U.S. would have required political backing to widen the perimeter of regulation to capture such institutions and then acted aggressively.

I show that such prudential regulation exhibits a striking electoral cycle: regulatory tools were much less likely to be tightened (and somewhat more likely to be loosened) in the quarters preceding 207 elections across 58 countries between 2000 and 2014. This electoral cycle in prudential tools is remarkably stable across countries and institutional regimes. Importantly, central bank independence does not appear to be an important moderating factor. This does not mean that central bank independence is irrelevant: monetary policy reacts much less strongly to upcoming elections in countries where monetary authorities are relatively independent.