•  Do regulatory policies – either the microprudential or macroprudential variety – have an impact on market liquidity or short-term interest rates? The BIS recently convened a working group to assess the impact of microprudential policy on the efficacy of monetary policy. The report concluded that it was difficult to draw firm conclusions. But there were some interesting observations. •  The lending activity of less well-capitalised, higher risk-taking or less liquid banks appears more responsive to a tightening of monetary policy. •  This would seem to suggest that more stringent regulations tend to weaken the transmission of monetary impulses. •  And the transmission of policy rate changes to other interest rates and asset prices may be altered if debt markets become less liquid as a result of regulatory changes. Conclusion Let me conclude by drawing together the main points. •  Microprudential policies are critically important for financial stability and we must get them right. •  But the ability of microprudential policies to achieve financial stability may be dampened by credit cycles that have their roots in broader macro forces. •  Monetary policy matters for financial stability because it affects the credit cycle. To what extent monetary policy should therefore take account of financial stability remains an unresolved matter. •  Macroprudential policy potentially offers a way out by targeting the macro sources of financial instability, leaving monetary policy to focus on price stability. •  But macroprudential policy is neither a panacea nor without cost or distortion.
•  Financing restrictions – in the form of LTVs and caps on loan tenures – were imposed on housing loans and car loans to moderate demand and reduce price pressures. •  Over 2013–2014, inflation came down steadily as housing and car prices declined. So, monetary policy and macroprudential policy can potentially be complementary to help achieve both macroeconomic stability and financial stability. They can do this sometimes by acting in the same direction; sometimes in opposite directions. •  Charles Bean 7 gives a useful pedagogical exposition of how a restoration of price and financial stability could be achieved by a combination of instrument tightening and loosening, similar to employing an optimal mix of fiscal and monetary policies to influence the composition of aggregate demand. 7  Bean, C. (2015), Comment on Applying an Inflation-targeting Lens to Macroprudential Policy Institutions, International Journal of Central Banking, Vol 11, Supplement 1  BIS central bankers’ speeches  7  •  But we need to deepen our understanding of when to use monetary policy and when to use macroprudential policy and when to combine the two, if at all. Does tighter regulation weaken the efficacy of monetary policy? There is one other aspect of the interaction between monetary and regulatory policy that I would like to touch on. •  Just as monetary policy that is set to achieve macroeconomic stability can sometimes be inappropriate for financial stability, could there be a situation where regulatory policy weakens the transmission mechanism of monetary policy?