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First, procyclicality of the financial system poses risk to financial stability, and to address it, efforts call for policy to dampen the procyclical effects through counter-cyclical financial regulation and macroprudential measures. Second, to avoid large build-up of excesses, macroeconomic policy especially monetary policy has an important role to play. And in the case of emerging markets, the procyclical behaviour of international capital flows adds another dimension of challenge because of its effects on domestic monetary conditions. Hence, to effectively address the issue, a combination of macroeconomic policy and financial regulation is needed to restrain the build-up of imbalance, a process to which procyclical financial behaviour is a key contributing factor. The current financial crisis also raises the issue of procyclicality. Apart from its global nature, a key feature of the current crisis when compared with past crises is the scale of excessive risk-taking and leverage that took place that was accentuated by procyclical financial behaviour. This, therefore, puts the issue of procyclicality and financial regulation into the policy spotlight. What I want to do this afternoon is to discuss procyclicality and the policy approach to address it from a wider perspective of macroeconomic management aimed at ensuring financial stability. My focus is to offer a framework for analyzing procyclicality, and to propose a view that policies from different orientations, especially financial regulation, are needed to deal effectively with the issue. In its simplest form, procyclicality refers to the interactions between the financial system and the real economy which are mutually reinforcing.