Abstract
The stability at both individual financial institution and financial system level are a prerequisite for the implementation of monetary policy. In particular, financial stability indicators are aggregate measures comprising of microprudential and macroprudential indicators, which define and signal the health and soundness of financial system in a country. The balance sheet of individual financial institution and financial system provide the information for deriving the financial stability indicators, which partly become the targets of monetary policy. Therefore, understanding the working of both macroprudential and monetary policies are crucial for measuring the soundness and stability of financial system. The aim of this chapter is to help guide policymakers and researchers in identifying policy-relevant questions that can inform policy decisions on the design and implementation of macroprudential policy tools going forward and on the interaction with monetary policy. Secondly, it is aimed to provide information for policymakers on existing issues, which can inform their current policy debates. The analysis of monetary policy tools, doctrines, and the implementation of monetary policy from selected countries are taken as comparison with the macroprudential tools. From the analysis, it is identified that macroprudential and monetary policy tools are different as well as the both of the targets. The effects of macroprudential policy tools are on the financing growth, leverage or capital, and asset prices. While the effects of monetary policy tools are on the reserve position and the benchmark rate in determining the profit margin and profit to be distributed. It is also concluded that the challenge for policymaker in analyzing the effectiveness of both macroprudential and monetary policies are to avoid financial instability.
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- 1.
Which holds that the creation of paper or credit money will not cause inflation as long as the money is issued in exchange for sufficient security.
- 2.
See Bindseil (2004).
- 3.
The interest rate on overnight loans between banks.
- 4.
Creation of the single European currency.
- 5.
The Lombard rate is the penal rate at which banks may obtain liquidity at short notice to meet temporary shortfalls in their reserve balances.
- 6.
“The Bank of Japan will provide more ample funds and encourage the uncollateralized overnight call rate to move as low as possible. To avoid excessive volatility in the short-term financial market the Bank of Japan will, by paying due consideration to maintaining market function, initially aim to guide the above call rate to move around 0.15 %, and subsequently induce further decline in view of the market developments” (Bank of Japan, Announcement of Decisions, February 12, 1999).
- 7.
Quantitative easing is sometimes described as “printing money,” although the financial authority actually creates it electronically “out of nothing” by increasing the credit in its own bank account.
- 8.
In Japan interest rate is referred to call rate and in the U.S it is the federal fund rate. These interest rates are sometimes informally called interbank rates.
- 9.
Refers to an equity based instrument that is issued against the government (or financial authority) ownership in commercial banks.
- 10.
Refers to an instrument that enables the government to raise funds through the issuance of securities that promise the investors a negotiable return that is linked to the developments in government revenue (a share in government revenue, for example) in return for their investment in the provision of general government services.
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Ismail, A.G., Ahmad, Z. (2016). Macroprudential Tools and Its Relationship with Monetary Policy Tools. In: Zulkhibri, M., Ismail, A., Hidayat, S. (eds) Macroprudential Regulation and Policy for the Islamic Financial Industry. Springer, Cham. https://doi.org/10.1007/978-3-319-30445-8_15
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