Macroprudential Policy

Abstract

ISSN 1609-0381 (print) ISBN 978-92-9197-635-5 (print) ISSN 1682-7651 (online) ISBN 978-92-9197-636-2 (online) BIS Papers No 86 iii Foreword Erdem Basçi 1 There are two major types of problems in the area of finance. These are " I don't know " type of problems and " I don't care " type of problems. The former perhaps can be addressed by "financial education." But the latter is better addressed by "financial regulation." Economic agents cannot easily assess the results of their financial activities. The main reason behind the "I don't know" type of problem is the difficulty in handling dynamic optimization. This difficulty exists even in fully deterministic dynamic optimization problems. The degree of difficulty is more pronounced for dynamic stochastic optimization problems. It is much more pronounced for problems that involve further complications, such as presence of an unusually high degree of uncertainty or uncertainty arising from interactive decision making and, perhaps, multiple equilibria. To mitigate this first type of problem, financial education would be useful. For example, Bernheim et al (2001)