Cochrane’s macroprudential rules

John Cochrane has a great post up on his blog about macroprudential policy, where he notes three important rules to their implementation:

  1. 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).
  2. Follow rules where possible instead of relying on discretion.
  3. 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!