Policies to Mitigate Procyclicality

May 7, 2009

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Format: Chicago

Policies to Mitigate Procyclicality, (USA: International Monetary Fund, 2009) accessed October 9, 2024

Summary

This paper examines the reasons for this, specifically focusing on regulations or market practices that can accentuate economic cycles. Although recognizing various practical limitations, new policy responses are identified that could help to mitigate procyclicality. Although economic cycles are taken as a natural and recurring phenomenon, there are ways in which private sector behavior and practices, prudential regulation, and macroeconomic policies can act to magnify such cycles. A key challenge for policymakers will be to counter the exacerbating effects of prudential regulations while at the same time keeping the risk-based decision-making processes that are increasingly used in the private sector. Procyclicality is also embedded in credit risk management systems and guidelines, because the inputs (default probabilities, loss severities, default correlations, and credit ratings) tend to vary positively with economic cycles. Credit ratings are supposed to be assigned on a “through-the-cycle” basis, and not according to transitory fluctuations in credit quality.

Subject: Asset and liability management, Asset prices, Banking, Credit risk, Financial regulation and supervision, Financial sector policy and analysis, Liquidity, Liquidity risk, Prices, Procyclicality

Keywords: Asset, Asset price bust, Asset price deflation, Asset price speculation, Asset prices, Central bank, Contingent liquidity risk, Credit growth, Credit risk, Fair value, Global, Liquidity, Liquidity event, Liquidity risk, Monetary policy, Price deflation, Procyclicality, Risk, Risk sensitivity, SPN

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Staff Position Note No. 2009/009
Stock No:

SPNEA2009009
ISBN:

9781462370719
ISSN:

2617-6742

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