John Cochrane has a great post up on his blog about macroprudential policy, where he notes three important rules to their implementation:
- Humility about our lack of knowledge, and thereby avoiding fine-tuning (note, the burden of proof may be set in different ways for “structural” policy – but when it comes to changing policy actively this constraint needs to be admitted).
- Follow rules where possible instead of relying on discretion.
- Limited power to “manage” the economy is part of independence – the more the Fed/central banks take on the more their independence will be undermined.
I agree with these rules, and think I was consistent with them in my recent discussion on LVRs in New Zealand here and here. I believe that central bank policy over here in New Zealand takes these issues into account – but I also have no doubt there is a clear debate to be had around rule following vs discretion (as has been had with inflation targeting). As a result, I will try to keep my mind open with regards to new information and new arguments 🙂
Update: Lars Christensen discusses the article in a lot more detail – strongly recommended read!