One that can explain the motions of both heavenly bodies and subatomic particles. I am on a similar quest this evening. My topic is one of the hottest fields in economic policy— macroprudential policy. A field that has something in common with Newton, for part of the responsibilities of macroprudential policy is to protect the economy from the madness of people. Macroprudential policy is as core to the responsibilities of central banks as their much better known twin, monetary policy. Both are fundamental to the value of money. The relative simplicity of the monetary policy objective and the relatively focused arsenal of monetary policymakers improve the likelihood that agents in the economy can understand the MPC’s reaction function and anticipate its actions, making its job of achieving price stability somewhat easier. 1 This evening I would like to improve the understanding of the FPC’s reaction function by placing its objectives and policies in a more consistent theoretical framework. A common framework can better explain seemingly disparate macroprudential policies and can guide future policy actions. This will be important if, as has happened all too frequently in the past, either a prolonged period of growth or the emergence of new  1 See ‘Guidance, Contingencies and Brexit’, speech by Mark Carney given at the Society of Professional Economists, 24  May 2018. 2  All speeches are available online at www.bankofengland.co.uk/news/speeches  2  era thinking threaten to take financial stability for granted once again, thereby sowing the seeds of a future crisis. II.
Another important example of delegation to experts has been the creation of independent central banks to decide on monetary policy to deliver an inflation target set by government. Frustration with high inflation in the 1970s made many countries move towards de-politicizing decisions about monetary policy and interest rates. Research suggested that political pressure led to an ‘inflation bias’ in policymaking, which could be 8  solved by delegating responsibility for price stability to independent central banks. The following decades  1  Source: Ourworldindata.org Source: World Health Organisation 3 Source: The World Bank 4 Where poverty is defined as living on less than $ a day at 2011 prices. Source: World Bank (http://data.worldbank.org/topic/poverty) 5 Source: World Bank 6 Source The Food and Agriculture Organisation (FAO) of the United Nations 7 Until 46 BC, the calendar used in the Roman Empire consisted of 12 months of a total of 355 days, with the intention that an additional month would be added in some years so as to keep the calendar in line with the solar year (of 365¼ days). The pontifices had some discretion over the calendar, meaning they could use it for political advantage by lengthening or shortening the terms of Roman magistrates who were supposed to serve for a calendar year. This led to considerable confusion for ordinary citizens as to what date it was. Moreover, by the 40s BC the Roman calendar was three months ahead of the solar calendar.