But despite their similarities, there are important differences between these policies pertaining to their focus and scope, the clarity of the policy objective, the policy horizon and the tools used, as set out in Table 1. It is sometimes argued that monetary and macro prudential policy are close cousins, and that changes in one can substitute for the other.
Of course, they both affect the supply of credit in the economy and therefore firms’ and households’ spending decisions. In turn, that means that they both affect economic activity and inflation. There is therefore a need for some coordination between them to ensure that they do not operate at cross purposes.