Macro-prudential policies address root of stability problems, says SNB’s Danthine

Jean-Pierre Danthine, a member of the governing board at the Swiss National Bank, on January 24 said macro-prudential measures would be less costly to an economy than policies that attempt to lean against the wind.

At the University of Zurich in Switzerland, Danthine said the huge cost of the recent financial crisis had decreased the weight of objections to ‘leaning against the wind' policies. However, he said an unfavourable trade-off between financial stability and output growth exists when leaning against the wind is the only instrument available to policy-makers. He cited two studies that suggest a drop of between 9 and 10 percentage points of real GDP in the US and between 11.5 and 20.0 percentage points in the UK would have been necessary to totally erase the two countries' real estate bubbles

Danthine said macro-prudential tools could be used as an alternative instrument to address the root problem of vulnerabilities in the financial system. He said in Switzerland, a small and open vulnerable economy, authorities were currently pursuing a comprehensive agenda of macro-prudential measures. "From a welfare perspective, a leaning-against-the-wind policy would clearly be dominated by instruments that target the root causes of those problems generated by excessive risk-taking in times of low interest rates," he said.

Click here to read the speech.