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Price And Financial Stability In Modern Central Banking

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  • José de Gregorio

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Abstract

It was not until the recent global crisis that financial stability was recognized as a central objective of central banks among advanced economies. However, the concerns for financial stability in emerging markets economies are much more long dated, and come from repeated experiences dealing with serious financial crisis. This paper reviews price and financial stability in central banking. It argues that price stability can be achieved with a flexible inflation-targeting regime, as they have succeeded in many emerging markets. Financial stability, in turn, requires micro supervision to insure strength of balance sheets of financial institutions. Nevertheless, this may not be enough to deal with financial stability as the interactions among institutions and their behavior along the business cycle may create fragilities. Macroprudential tools may complement regulation to insure financial stability. The paper discusses on the instruments for financial stability and the interactions between financial and price stability, which brings new challenges to central banking.

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Bibliographic Info

Article provided by LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION in its journal JOURNAL OF LACEA ECONOMIA.

Volume (Year): (2012)
Issue (Month): ()
Pages:

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Handle: RePEc:col:000425:010027

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Keywords: Central Bank; financial stability; inflation; institutions; banking; price;

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  1. Luca Gambetti & Jordi Galí, 2007. "On the sources of the Great Moderation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  2. Jordi Gal� & Mark Gertler, 2007. "Macroeconomic Modeling for Monetary Policy Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 25-46, Fall.
  3. Ben S. Bernanke & Michael Woodford, 1997. "Inflation forecasts and monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 653-686.
  4. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers 615, Stockholm University, Institute for International Economic Studies.
  5. Acharya, Viral V & Naqvi, Hassan, 2012. "The Seeds of a Crisis: A Theory of Bank Liquidity and Risk-Taking over the Business Cycle," CEPR Discussion Papers 8851, C.E.P.R. Discussion Papers.
  6. Marcus H. Miller & Paul Weller & Lei Zhang, 2002. "Moral Hazard and the US Stockmarket: Analyzing the "Greenspan Put"," Working Paper Series WP02-1, Peterson Institute for International Economics.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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