Following the boom and bust of the 2000s, there is widespread agreement that residential real estate is a key source of vulnerability in advanced and emerging economies alike. Housing accounts for a significant fraction of wealth, especially for people in the middle of the income distribution, who are much less likely to own risky financial assets (see our earlier post). Furthermore, housing is highly leveraged, creating risks to both homeowners and their lenders.
In the United States, real housing prices have rebounded by nearly 40 percent from their 2012 trough. Today, they are only about 10 percent shy of their 2006 peak. As such, it is natural to ask whether we are once again facing a heightened risk of a crash. Enter “House Prices at Risk” (HaR)—a new worst-case metric created by the IMF to assess the likely scale of a housing price bust conditional on a bad state of the world. Consistent with the IMF’s previous work on “GDP at Risk” (see our earlier post), we view HaR as a valuable addition to the arsenal of risk indicators that allow market professionals and policymakers to monitor financial vulnerability…. Read More
Through what administrative means should a democratic society in an advanced economy implement regulation? In practice, democratic governments opt for a variety of solutions to this challenge. Historically, these approaches earned their legitimacy by allocating power to elected officials who make the laws or directly oversee their agents.
Increasingly, however, governments have chosen to implement policy through agencies with varying degrees of independence from both the legislature and the executive. Under what circumstances does it make sense in a democracy to delegate powers to the unelected officials of independent agencies (IA) who are shielded from political influence? How should those powers be allocated to ensure both legitimacy and sustainability?
These are the critical issues that Paul Tucker addresses in his ambitious and broad-ranging book, Unelected Power. In addition to suggesting areas where delegation has gone too far, Tucker highlights others—such as the maintenance of financial resilience (FR)—where agencies may be insufficiently shielded from political influence to ensure effective governance. His analysis raises important questions about the regulatory framework in the United States.
In this post, we discuss Tucker’s principles for delegating authority to an IA. A key premise—that we share with Tucker—is that better governance can help substitute where simple policy rules are insufficient for optimal decisions…. Read More
For several decades, central bankers have been the key risk managers for the economy and the financial system. However, they failed spectacularly to anticipate and prevent the financial crisis of 2007-2009. The financial regulatory reforms since the crisis—capital and liquidity requirements, resolution regimes, restructuring of derivatives markets, and an evolving approach to systemic risk assessment and (macroprudential) regulation—have all been directed at improving the resilience of the system to help sustain strong and stable economic growth. As a result, the likelihood of another crisis-induced plunge in GDP is much lower today than it was a decade ago.
But we still have plenty of work to do. We are at an early stage in the process of building a financial stability policy framework that corresponds to the inflation-targeting framework which forms the basis for monetary policy. Such a framework requires measurable financial stability objectives that are akin to a price index, tools comparable to an interest rate, and dynamic models that help us to understand the link between the two.
In this post, we describe a step forward in developing such a framework: the concept and measurement of GDP at risk.... Read More