A typical example is a financial crisis situation in which a macroprudential policy authority wishes to reduce the capital buffers of banks in order to stimulate lending while, from a microprudential perspective, it would instead be desirable to see the banks strengthening their balance sheets with more equity. So, there is a need to coordinate these policy areas too. Also, the knowledge about individual institutions generated in microprudential supervision work is important to understanding risk build-up at systemic level. Wind strength is also affected by other policy areas Not only is there a strong link between monetary and macroprudential policy and a need to coordinate macroprudential and microprudential supervision – the need to lean against the wind is also affected by other policy areas. Fiscal policy has a significant influence on borrowing and lending incentives. However, other policy areas can also come into play, such as housing policy when it comes to household indebtedness. There is thus a limit to what can be achieved by macroprudential policy, or monetary policy for that matter, which depends on other policy areas. The opportunities and limitations of macroprudential policy – the example of the Swedish household sector I will now be much more specific about the opportunities and limitations of macroprudential policy by focusing on a concrete example. By now, it is well known that, for a number of years, the Riksbank has seen substantial risks associated with household indebtedness.
There is some concern about mis-measurement of the level of demand in the economy. But compared to the past, changes in ONS methodology and improvements in the measurement of financial sector output in particular, should mean that the very large revisions to growth in the past, which prompted large revisions to views of inflationary pressure, now seem less likely. 9 And, in the present context of a fall in output of 6.2% in the six quarters to the third quarter of 2009, there seems little doubt that a sizeable output gap has opened up. Nevertheless, the MPC indicated in the last Inflation Report that we expect GDP data for 2009 to be revised up somewhat in due course, and that was taken account of in the forward projections. A second source of uncertainty stems from the specification of the output gap. The way in which potential output is estimated in BEQM reflects largely shocks to supply (the capital stock and labour supply). However, arguably for judging inflation pressure after some shocks this is not necessarily the right approach. 10 For example, a rise in commodity prices, or a fall in the exchange rate, may have a long-run impact on supply, by making some supply uneconomic and bringing about some capital scrapping. This is captured in our framework. In the short term, the increases in firms’ costs, leads to both a fall in output and a rise in inflation pressure. This fall in output does not indicate a negative output gap.