Macroeconomic and Macroprudential Policy Making

This short and preliminary paper considers the relationship between fiscal, monetary and prudential policy instruments. It argues that the currently employed instruments (government borrowing, expansion of central bank balance sheets) do not address the underlying reason for slow global growth, the high levels of leverage in the (public and private) non-financial sector. It suggests that addressing this problem requires ‘monetary expansion by gift’ (also known as helicopter money). It further argues that this should be treated from an accounting perspective so that it does not result in any deterioration in central bank net worth and employment of this instrument should be independent of day-to-day political control and therefore conducted by an independent central bank as one of the basic monetary policy instruments. It also argues that macroprudential policies will then be needed to restrain unsustainable credit expansions and are operationally are best though as a branch of large exposure regulation, focusing on the exposure of institutions to systemic risks such as commercial property prices or maturity mismatch.