10.36172/EKONOMISTI.2021.XVII.02.Zhorzhikashvili

Resume 

The global financial crisis 2008 once again raised the issue of more active use of macroprudential policies, as it became clear that microprudential policies and its regulations were not sufficient for financial stability. Prior to the global financial crisis, it was widely believed in academic circles, that there was a conflict (inflation / financial stability) between monetary policy and prudential policy, which justified the separation of monetary and prudential functions. Due to this approach, a significant trend of segregation of functions was observed in some countries. After the crisis, the weaknesses of this approach became clear and countries began to actively pursue macroprudential policies integrated with monetary policy.        

  Prior to the global financial crisis, there was a widespread belief in academic circles around the world, including Europe, that price stability in the commodity and services markets would be sufficient for financial stability. The pre-crisis consumer price index in the euro area was quite low and stable, although systemic risks still accumulated in the financial sector due to the credit boom and the use of new financial instruments. During the economic downturn, these financial instruments were characterized and associated with really low risk, although they were very sensitive to systemic risk. In this case, the task of the financial market is to assess the risk and redistribute resources, although the financial market has failed to perform this function in relation to complex instruments.      

  Ensuring stability in the financial sector is the prerogative of macroprudential policies, which require the use of appropriate tools, periodically improving them in the wake of economic development and globalization. The introduction and improvement of macroprudential policies helps, on the one hand, to identify systemic and sectoral risks and, on the other hand, to establish an effective financial flow management system.

   Monetary policy should be largely responsible for regulating the business cycle, which means stabilizing inflation rates and interest rates by using inflation "targeting". However, it should be noted that no central bank can fully control the financial markets. But monetary policy has an excellent instrument in the form of macroprudential policy, that can take responsibility for the stability of the financial system and the cycle.

   Moreover, it should be noted that monetary policy can even contribute to the accumulation of risks in the financial sector. In particular, when the central bank aims to stimulate consumer spending by lowering interest rates, this may significantly increase securities prices and create a breeding ground for a "speculative soap bubble" that threatens financial stability. On the other hand, pursuing a restrictive monetary policy raises interest rates, which reduces aggregate demand in the economy and may lead to a slowdown in the long-term growth rate of the economy. Thus, monetary policy faces challenges and it is clear, that achieving financial stability in isolation is impossible. Therefore, no country today considers monetary and macroprudential policies in isolation, on the contrary, the success of the coordinated use of their instruments can be seen in the example of many countries.     

  Therefore, the issue of integration of macroprudential and monetary policies and the need for close coordination arises. Both policies work to ensure financial stability, albeit with different instruments and channels, but their ultimate goal is one — to promote the country’s sustainable development and long-term economic growth. Monetary policy contributes to price stability and output levels in the economy, while macroprudential policy focuses on identifying and eliminating systemic risks. As a result of the integration of these policies, the economic system becomes more resilient and flexible to shocks and allows the defects of both policies to be overcome. Macroprudential policy interventions with a countercyclical buffer of capital and other instruments aimed at neutralizing procyclicality, largely determine the effectiveness of monetary policy. The continuous development of innovations and technologies in the financial sector requires closer coordination and the implementation of well-organized policies in the light of the existing reality.      

  Therefore, we can conclude that:

1) Macroprudential policy is very effective in regulating the credit cycle;

2) Macroprudential instruments have the greater effect on the credit cycle, the closer the integration with monetary policy.

  The interaction between macroprudential and monetary policies is quite strong, which is due to the fact that they have common transmission channels. Decisions made in one policy have a major impact on the effectiveness of another policy and its consequences. As mentioned above, this is due to the fact that they are complementary policies that use similar transmission channels to achieve their goals, hence the scope of these policies. Offers new ways to regulate credit and financial cycles.

 The broad credit channel is one of the most common transmission channels used by both policies. Bank lending and its management are used both by monetary policy and successfully used in macroprudential policy.  The impact of transmission mechanisms on the real sector of the economy means the impact on aggregate demand and its components as a result of changes in the central bank interest rate.

  Interest rate channel - lowed interest rates may have a negative impact on the condition of financial institutions, as lower interest rates mean lower returns. The 2008 crisis showed that due to reduced returns, financial institutions and private commercial banks began to use new instruments that were seemingly safe, but became a major threat during the crisis and led to financial instability.

 Risk channel- In case of low interest rates and hence rising stock prices, the financial sector faces the problem of risk accumulation. In turn, as the demand for loans from businesses increases, they try to buy securities, which further increases their price and, consequently, puts speculative pressure on the financial market.

  In conclusion, the current traditional macroeconomic and prudential oversight mechanisms fail to ensure financial stability. The need to reform financial regulation and banking supervision, tighten and introduce macroprudential norms is on the agenda. Empirical studies have shown, that the monetary policy response is delayed in economics, its effects require a relatively large period of time to achieve the desired effect, so it is necessary to actively use macroprudential policies, that can stabilize the situation in the financial sector in the short term, but its impact is limited. Therefore, great importance is attached to the integration of these policies and their simultaneous use to prevent macroeconomic shocks.