As Chart 5 illustrates, between 1995 and 1999 interest rates fell by between 3 and 6 percentage points in Ireland, Spain and Portugal. And in Greece between 1995 and 2001, interest rates fell by a remarkable 16 percentage points. Whether by coincidence or causality, what happened next in credit markets in these countries was dramatic. The credit gaps in each of Spain, Portugal, Ireland and Greece widened significantly and continued widening through the early part of this century (Chart 6). By 2008, these credit gaps stood at over 25 percentage points in Greece and Portugal, almost 40 percentage points in Spain and over 50 percentage points in Ireland. It is unlikely that any of these countries have previously seen credit booms on this scale. It is useful again to rerun history and ask how macro-prudential policy might have looked over this period. Charts 7 and 8 give the “Minsky rule” paths for bank capital ratios in Spain and Ireland relative to their actual paths. As in the US, they show macro-prudential policyimplied capital ratios lying significantly above their actual paths, by progressively larger amounts. At their peak, Minsky rule paths for bank capital are more than twice their actual levels in Spain and three times their actual level in Ireland. Macro-prudential stringency would have counteracted the loosening of monetary policy.
Such an exercise is essentially identical to the common practice of constructing Taylor rules for monetary policy, as in Chart 2. Chart 4 draws the macro-prudential policy-implied path of US bank capital ratios. In deference to the architect of modern theories of credit-induced instability, let us call this the “Minsky rule” [Minsky, 1986]. The path of the Minsky rule is, in many respects, the mirrorimage of the Taylor rule. It suggests that hypothetical US banks’ capital ratios would have been systemically and significantly tighter than their actual path between 2000 and 2009. In  2  BIS central bankers’ speeches  other words, a tight macro-prudential stance would have counteracted the effects of a loose monetary policy stance. Although it is impossible to know for certain, it seems plausible that having this extra degree of policy freedom would have helped stabilise the US economy and financial system. A tighter bank capital regime would have tended to slow pre-crisis credit growth, thus constraining the boom. And more capital in the US banking system would have helped protect the wider economy from the credit crunch that followed the bust. In short, the boombust cycles in US credit and GDP would have plausibly been somewhat less severe had US policy been ambidextrous. The euro-zone crisis As a second historical example, consider the behaviour of some euro-zone crisis countries. In the run-up to monetary union, monetary policy was loosened significantly in a number of the peripheral European countries whose interest rates converged on core euro-area countries.