The key difference is that the inflation target is symmetric – the monetary policymaker’s loss grows equally when inflation is either under or over the target, whereas the macroprudential policymaker’s loss function is asymmetric – increases (ie deteriorations) in GDP-at-risk are far more costly than the benefits of the reductions in GDP-at-risk. The relationship between the primary objective of financial stability and the macroprudential policymaker’s loss function can be represented by a decreasing and convex function, 𝑓(·). This means the marginal gains from taking action to protect financial stability grow as GDP-at-risk increases. Conversely, the marginal benefit from reducing GDP-at-risk falls as tail risks decline. This is illustrated in Chart 7. Financial risks increase moving along the curve to the right. A policy to reduce GDP-at-risk (lines A) is more valuable to the policymaker at higher levels of GDP-at-risk (line B) than lower levels (line C). The weight the macroprudential policymaker places on the central GDP forecast relative to GDP-at-risk is also determined by 𝜙 (“phi”). 𝜙 is analogous to the monetary policy’s 𝜆, the weight monetary policymakers place on output stabilisation relative to inflation stabilisation. 𝜙 is strictly greater than 0, as dictated by the “stability of the graveyard” clause in the Act that the FPC should not take action detrimental to medium-to-long term growth.13 In its annual remit letter, the emphasis the government places on this clause, and therefore the FPC’s secondary objective, can be thought of as changing 𝜙.

More recently, the FPC has taken a series of measures to address potential disruptions to financial services because of disorderly Brexit; to support a smooth transition in benchmark interest rates from Libor to SONIA; to address risks from open-ended funds and have also put in place structural measures to address risks from climate change. 14 As well, both the duration and amplitude of financial cycles has increased since the mid-1980s. For empirical evidence  on financial cycles, see: Drehmann, M, Borio, C and Tsatsaronis, K (2012), “Characterising the financial cycle: don’t lose sight of the medium term”, BIS Working Papers 380; Claessens, S, Kose, M and Terrones, M (2012), ‘How do business and financial cycles interact?’, Journal of International Economics’, Volume 87; and Aikman, D, Haldane, A, and Nelson, B (2013), “Curbing the credit cycle”, The Economic Journal, June. 15 Claudio Borio defines the financial cycle as “self-reinforcing interactions between perceptions of value and risk, attitudes towards risk and financing constraints, which translate into booms followed by busts. These interactions can amplify economic fluctuations and possibly lead to serious financial distress and economic dislocations.” See Borio, C (2014), “The financial cycle and macroeconomics: what have we learnt?”, Journal of Banking & Finance, vol 45, pp 18298, August. 16 This debate is an old one. Arthur Pigou described government as “the trustee for unborn generations as well as for its present citizens”; Frank Ramsey referred to pure time preference discounting as “a practice which is ethically indefensible and arises merely from weakness of the imagination”.