This chapter considers the challenges that macroprudential authorities face in activating, calibrating and deactivating macroprudential tools and seeks to bring greater clarity on the legal and practical ways to address these challenges. It, accordingly, addresses the following questions: which macroprudential tools are currently available ? Should combined tools be used ? Should a cautious and gradual or more activist approach be taken when calibrating tools ? How targeted should the tools be ?

Section 1 begins with outlining the prevalent taxonomies of macroprudential tools and the state of use of these tools around the globe. Section 2 presents the potential approaches in selecting and calibrating macroprudential tools, including a multi-pronged approach; a gradual or active and bold approach; targeted or broad-based action and flexible policy at the national level or policy that focuses on creating a level playing field. The section then critically analyses the strengths and weaknesses of these approaches. Section 3 delves deeper into the challenges of activating and calibrating macroprudential tools. These range from difficulties in assessing the effectiveness of the tools, in timely activation and deactivation, in controlling leakages domestically and across borders, in coordinating between macroprudential tools and other policy areas and utilising complementarities. Section 3 also addresses the potential distributional effects of the macroprudential sectoral housing tools. Section 4 provides a brief summary of the evidence available to date on the effectiveness of macroprudential tools and explores the legal and practical ways to address the identified challenges and enhance the effectiveness of the tools.

PREVALENT TAXONOMIES OF MACROPRUDENTIAL TOOLS

There is a broad array of macroprudential tools that could be used to prevent or at least, mitigate systemic risks. Many of the tools are in effect micro-prudential tools, which are adapted and deployed with a systemic perspective in mind, but there are also taxes and levies as well as newly designed macroprudential tools. Experience with implementing macroprudential instruments can be dated back as far as the 1930s. Nevertheless, in the years following the 2007 – 2009 financial crisis, macroprudential measures have been deployed far more actively compared to the pre-crisis, particularly in Asia-Pacific and Central and Eastern Europe.

Naturally, the activation and use of macroprudential tools are subject to their availability in the macroprudential authority ‘ s toolkit and this feature may differ across jurisdictions.