of macro prudential policy. but despite their similarities, there are important differences between these policies pertaining to their focus and scope, the clarity of the policy objective, the policy horizon and the tools used, as set out in table 1. it is sometimes argued that monetary and macro prudential policy are close cousins, and that changes in one can substitute for the other. of course, they both affect the supply of credit in the economy and therefore firms ’ and households ’ spending decisions. in turn, that means that they both affect economic activity and inflation. there is therefore a need for some coordination between them to ensure that they do not operate at cross purposes. this is one reason why it is essential that the central bank is crucially involved in the formulation of macro prudential policy. but despite their similarities, there are important differences between these policies pertaining to their focus and scope, the clarity of the policy objective, the policy horizon and the tools used, as set out in table 1. first, the focus of the two policies is different. monetary policy focuses on the most likely rate of inflation at some future date. by contrast, macro prudential policy aims to avoid some highly adverse and unlikely tail event. since crises occur rarely, it is difficult for the public to monitor the success of macro prudential policy. the policy horizons are also different. monetary policy impacts on inflation with a time lag of about 2 years. since senior central bankers are typically appointed for a period of five or six years, it is reasonably easy for the public to judge their performance and ascertain whether price stability has been achieved. by contrast, asset price bubbles are slow to develop and shocks of sufficient magnitude to burst a bubble happen only rarely. thus, it is possible for macro prudential policy to be too lax for an extended period of time without a collapse occurring. this makes it difficult for the public to judge whether policy makers are achieving their objective. the clarity of the objectives also differs. monetary policy is typically geared at ensuring that inflation is at some announced target level. in the case of the euro area, this level is “ below but close to two per cent ”. since there is monthly data on inflation, it is simple to monitor the central bank ’ s skill in pursuing price stability. assessing financial stability policy is arguably much harder. as an illustration many analysts define it as the absence of financial instability. this difficulty in defining financial stability makes it problematic for the public to judge how

successful macro prudential policy is. further differences concern the instruments. monetary policy in normal times – that is, when the interest rate is above some lower bound and interbank markets function properly – is conducted by controlling nominal short - term interbank rates. this is a blunt instrument that affects the economy in many ways. by contrast, macro prudential policy can – in principle – be made to focus on only some banks or some types of lending. while some observers have suggested that monetary policy can be used as a macro prudential tool, the earlier consensus that monetary policy should focus on ensuring price stability remains unchanged. nevertheless, there is broad agreement that financial developments needs to be taken into account more fully in monetary policy than previously was the case in many central banks ( imf 2010 ). one reason central banks did not monitor financial market developments sufficiently closely before the crisis was that macro economic models typically do not rely on information from corporate balance sheets, financial intermediaries and asset prices ( kohn 2009 ). bis central bankers ’ speeches overall, the thrust of the analysis above is that monitoring how well macro prudential policy is conducted is difficult. in particular, it is hard for the policy maker to demonstrate what benefits come from pursuing particular policy actions. this is particularly so if policy is successful and financial stability is maintained, in which case all the public can see is the macro prudential policy makers moving their instruments and making statements, but no evidence of financial instability. by contrast, the costs of various macro prudential policy measures will be readily felt. since a tightening of macro prudential policy is likely to reduce the profitability of financial firms, one would expect on occasion strong reactions from the financial sector when macro prudential policy is tightened. this combination of difficult - to - measure future benefits and obvious and immediate costs can lead to a strong bias against taking macro prudential action, even when policy makers believe it is necessary. this arguably was the case in a number of countries before the financial crisis erupted in 2007 – 08. it is therefore essential to strengthen policy makers ’ willingness to act against perceived risks by providing them with clear objectives and independence, and by making them accountable for the outcomes of policy. 3. 2 macro prudential tools addressing excessive property lending what are the tools available to macro prudential policymakers? many instruments have been discussed and, in the interest of brevity, table 2 outlines only a few possible tools that have been adopted