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Managing price and financial stability objectives - what can we learn from the Asia-Pacific region?

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  • Soyoung Kim
  • Aaron Mehrotra

Abstract

The international financial crisis led many central banks to adopt explicit financial stability objectives. This raises the question of how central banks deal with policy trade-offs resulting from potential conflicts between price and financial stability objectives. We analyse this issue in the Asia-Pacific region, where many economies with inflation targeting central banks have adopted macroprudential policies in order to safeguard financial stability. Using structural vector autoregressions that identify both monetary and macroprudential policy actions, our results highlight similarities in the effects of monetary and macroprudential policies on the real economy. Tighter macroprudential policies used to contain credit growth have also had a negative impact on output and inflation. The similar effects of monetary and macroprudential policies could create challenges for policy, given the frequency of episodes where low inflation coincides with buoyant credit growth.

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  • Soyoung Kim & Aaron Mehrotra, 2015. "Managing price and financial stability objectives - what can we learn from the Asia-Pacific region?," BIS Working Papers 533, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:533
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    Cited by:

    1. Katsurako Sonoda & Nao Sudo, 2015. "Is macroprudential policy instrument blunt?," Bank of Japan Working Paper Series 15-E-11, Bank of Japan.
    2. Soyoung Kim & Aaron Mehrotra, 2016. "Maintaining price and financial stability by monetary and macroprudential policy - evidence from Asia and the Pacific," BIS Papers chapters, in: Bank for International Settlements (ed.), Expanding the boundaries of monetary policy in Asia and the Pacific, volume 88, pages 17-28, Bank for International Settlements.
    3. Kim, Soyoung & Oh, Junbeom, 2020. "Macroeconomic effects of macroprudential policies: Evidence from LTV and DTI policies in Korea," Japan and the World Economy, Elsevier, vol. 53(C).
    4. Patnaik, Ila & Mittal, Shalini & Pandey, Radhika, 2019. "Examining the trade-off between price and financial stability in India," Working Papers 19/248, National Institute of Public Finance and Policy.
    5. Alberto Naudon & Andrés Pérez, 2017. "An Overview of Inflation-Targeting Frameworks: Institutional Arrangements, Decision-making, & the Communication of Monetary Policy," Working Papers Central Bank of Chile 811, Central Bank of Chile.
    6. Gabriele Galati & Richhild Moessner, 2018. "What Do We Know About the Effects of Macroprudential Policy?," Economica, London School of Economics and Political Science, vol. 85(340), pages 735-770, October.
    7. Akhmad Syakir Kurnia & Syahid Izzulhaq & Johan Beni Maharda & Agung Kunaedi, 2021. "Inflation and Financial Stability Trade‐off: Role of Monetary Policy Credibility and Fiscal Cyclicality," Economic Papers, The Economic Society of Australia, vol. 40(1), pages 31-53, March.

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    Keywords

    multiple objectives; financial stability; price stability; macroprudential instruments; monetary policy;
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