Answer to Question #295615 in Macroeconomics for AIDIL

Question

What is the macro prudential tools? Explain by giving three (3) appropriate examples.   

Answer 1

In any nation-state, the proper regulation of the financial system ensures stability in economic growth and serves as a check against unprecedented systemic risks that can send the economy crashing down. Consequently, macroprudential policies are geared at achieving these objectives in the macroeconomy (i.e, the aggregate economy), usually undertaken by a relevant regulatory body (International Monetary Fund, 2014).

These macroprudential policies are usually geared at reducing liquidity in the country through a variety of policies, which may include a cash reserve requirement, placing a restriction on the amounts of customer deposits commercial banks can use in creating more money in the economy.

Also, these policies could go as far as including a cap on the interest rate that can be reaped or earned by a loan provider, thereby limiting the earning potential of that security, which translates to a reduction in the overall national liquidity.

Finally, these policies could manifest by way of a limit on credit growth available to individuals or companies, and avoid the creation of excess money supply in the economy.

Reference

International Monetary Fund (IMF). (2014). An Overview of Macroprudential Policy Tools. Author; Washington, DC