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By David Robinson
     LONDON (MNI) - Bank of England Deputy Governor Ben Broadbent hit back
against the idea of merging monetary and macro-prudential policy making, saying
that the evidence is that the two have little effect on each other.
     Broadbent, in a speech Thursday at the Reserve Bank of Australia, also
argued that if the BOE's monetary and financial policy committees were merged,
the joint committee would tend to prioritise the former, where success is easier
to measure, at the expense of the latter.
     He said it was wrong to assume that macro-prudential tools, designed do
such things as boost Bank capital and curb high risk lending, had a significant
impact on key variables for monetary policy. Conversely monetary policy changes
had little effect on financial stability.
     A recent study found "that monetary policy has relatively weak effects on
financial stability, at least in the UK" but also, in part because they are
directed at reducing tail risks, "macro-prudential policies do not have very
large effects on demand and inflation," Broadbent said.
     A 100 basis point increase in the key policy rate, for example, will
typically lower output and inflation by more than 0.5 percentage point while on
the macro-prudential side a 100bps increase in banks' counter-cyclical capital
buffers would knock just 0.1 pp off growth and next to nothing off inflation.
     So the spill-overs between macro and monetary policy are not large.
Broadbent said the evidence was that even hefty increases in Bank Rate before
the financial crisis would have done little to reduce banks' balance sheets and
improve financial stability.
     "The gains from formal co-ordination might not be that significant,"
Broadbent said.
     He also noted that the success of policies designed to improve financial
stability are hard to measure -- statistically it would be impossible to say if
any reduction in the frequency of financial crisis over relatively short-time
periods was more likely due to policy setting or dumb luck.
     Under these circumstance a policymaking committee charged with both
financial stability and monetary policy would tend to focus on the latter where
success is far simpler to measure - the achievement of the inflation target.
     Broadbent's speech was a defence of current arrangements in  the UK, where
two separate committees, the Financial Policy Committee and the Monetary Policy
Committee, operate under the BOE's roof, with separation of powers and both
answerable to parliament.
     His speech contained no comments on the current monetary policy
--MNI London Bureau; tel: +44 203-586-2223; email:
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