let me focus a little more on the arguments surrounding time - varying and time - invariant policies. currently central banks are focussing squarely on the design of time - varying macroprudential policy instruments. such instruments focus on stabilising the financial system throughout the aggregate risk cycle by building cushions during good times so that financial institutions have the capacity to deal with risks when they materialise in bad times. since we are in the wake of such a financially destructive boom and bust, the desire of global policymakers to minimise the risks inherent in future booms is understandable. however, policymakers must ask themselves whether we are in danger of relying too much on time - varying macroprudential policies. to my mind, time - varying macroprudential policy instruments have profound limitations. firstly, the effectiveness of these instruments assumes that the policymaker can detect accurately the build - up of systemic risk. systemic risk is, however, hard to measure. while there are some reasons to believe that we can provide early warnings of dangerous buildups in risks ( dell ’ ariccia et al., 2012 ; drehmann et al., 2012 ), there is little evidence that these warnings are reliable. the imf shows, for instance, that even measures of systemic risk based on the growth rate and level of credit produced very low probabilities of crisis before 2007 ( imf, 2011 ). no model or method to assess systemic risk professes to be complete or adequate ( bisias et al., 2012 ). confounding improvements in measurement is the fact that it is difficult to operationalize the concept of systemic risk. a second limitation of time - varying macroprudential policy is that, even if a dangerous buildup of risk is detected, it is not clear what action the policymaker should take. this makes it likely that the policymaker will face heavy criticism from those likely to be affected by policy action, and therefore more likely to engage in forbearance. the idea that the public sector knows better than the collective wisdom of the market will always be controversial and disputed. rules will be challenged, the integrity of indicators will be called into doubt and resistance will be high. it therefore seems hazardous to rely solely on time - varying macroprudential policy to ensure financial stability. macroprudential policy should therefore be built on a strong, time - invariant foundation of microprudential and macroprudential regulations that aim to ensure financial institutions

. 1. what is macroprudential policy? it is useful to start with a definition : by macroprudential policy we mean efforts by the macroprudential policy makers to limit systemic risk, that is, the risk of disruptions to the provision of financial services caused by an impairment of the financial system, with serious negative consequences for the real economy and welfare. 2 the tools that are used are primarily the prudential tools that microprudential supervisors are using to limit the risk to the soundness of individual financial firms. i emphasise that while there are many policies that can be used to strengthen the overall financial system, only those under the control of the macroprudential policy maker constitute the central bank of ireland ’ s mandate for macroprudential oversight stems from its responsibilities regarding the stability of the financial system : the central bank reform act 2010 lists “ the stability of the financial system overall ” as one of the institution ’ s central objectives. see the discussion in lim et al. ( 2011 ). bis central bankers ’ speeches macroprudential policy. for instance, tax policy can be an effective tool for combatting housing bubbles, but is not macroprudential policy. 2. why do we need macroprudential policy? the recent global financial crisis has highlighted the fact that traditional macroeconomic stabilisation and microprudential policies are not enough to ensure the stability of the broader financial system. the reason for this is that actions of individual firms can create interdependencies, potentially leading to systemic risk developing. the rationale for using macroprudential policy rests on three factors. 3 first, the tendency of the financial system to amplify shocks. for instance, banks may respond to a downturn in the economy by cutting new lending, reinforcing the downturn. second, feedback mechanisms that can result in an overexposure to adverse aggregate shocks. for instance, the interdependencies between credit and asset prices can lead to a situation in which bank lending drives up asset prices and therefore collateral values, leading to additional lending and further asset price increases. third, financial linkages that increase the vulnerability of the system to shocks. while many of these may be in the form of direct exposures, linkages may be under the radar screen of regulators and take the form of implicit guarantees or exposures in derivatives and funding markets. 3. what are the policy options? macroprudential policy has