The paper proposes a simple, new, analytical framework for assessing the cost and benefits of macroprudential policies. It proposes a measure of net benefits in terms of parameters that can be estimated: the probability of crisis, the loss in output given crisis, policy effectiveness in bringing down both the probability and damage during crisis, and the output-cost of a policy decision. It discusses three types of policy leakages and identifies instruments that could best minimize the leakages. Some rules of thumb for policymakers are provide.

The main contribution of the paper is to provide a unified framework for assessing net benefits of macroprudential policy, together with guidance on assessing policy leakages. The paper suggests a simple conceptual framework for comparing the costs with benefits of macroprudential policy.2The concept of long-run cost and benefit is adopted from BCBS (2010a), albeit with differences in detail. The costs arise from an increase in the cost of intermediation and its effect on long-run output. The benefit is derived from the resilience of the economy from the policy measure—a reduction in the probability of a crisis and output losses in the event of a crisis. As a bi-product, the paper also suggests a method for analyzing feedbacks between the financial sector and real economic activity that could be useful for policymakers in general.