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Central Banking for Financial Stability in Asia

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Author Info

  • Masahiro Kawai

    (Asian Development Bank Institute (ADBI))

  • Peter J. Morgan

Abstract

A key lesson of the 2007–2009 global financial crisis (GFC) was the importance of containing systemic financial risk and the need for a “macroprudential†approach to surveillance and regulation that can identify system-wide risks and take appropriate actions to maintain financial stability. By virtue of their overview of the economy and the financial system and their responsibility for payments and settlement systems, there is a broad consensus that central banks should play a key role in monitoring and regulating financial stability. Emerging economies face additional challenges because of their underdeveloped financial systems and vulnerability to volatile international capital flows, especially “sudden stops†or reversals of capital inflows. This paper reviews the recent literature on this topic and identifies relevant lessons for central banks, especially those in Asia’s emerging economies. Major topics discussed include the debate about the definition of financial stability, the consistency of a financial stability objective with the more traditional and well-established central bank objective of price stability, the appropriate governance structure for coordination of macroprudential policy with other financial supervisors and entities, and the appropriate policy instruments to achieve macroprudential policy objectives, including conventional, unconventional, and macroprudential tools. Finally, the paper considers issues involved with regional financial regulatory cooperation. Overall, the report concludes that the “lean versus clean†debate has been resolved largely in favor of the former, and that central banks should have a financial stability mandate and the policy tools to successfully pursue that mandate.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 23328.

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Date of creation: Aug 2012
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Handle: RePEc:eab:macroe:23328

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Related research

Keywords: Asia; Central Banking; Financial Stability; GFC lessons; systemic financial risk; emerging economies; macroprudential; financial system; financial regulatory cooperation; central banks;

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  1. Paul Bloxham & Christopher Kent & Michael Robson, 2010. "Asset Prices, Credit Growth, Monetary and Other Policies: An Australian Case Study," RBA Research Discussion Papers rdp2010-06, Reserve Bank of Australia.
  2. Goodfriend, Marvin, 2000. "Overcoming the Zero Bound on Interest Rate Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 1007-35, November.
  3. Ben Bernanke & Mark Gertler, 2000. "Monetary Policy and Asset Price Volatility," NBER Working Papers 7559, National Bureau of Economic Research, Inc.
  4. Claudio Borio & Piti Disyatat, 2010. "Unconventional Monetary Policies: An Appraisal," Manchester School, University of Manchester, vol. 78(s1), pages 53-89, 09.
  5. Ben S. Bernanke & Vincent R. Reinhart, 2004. "Conducting Monetary Policy at Very Low Short-Term Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 85-90, May.
  6. Stefan Gerlach & Wensheng Peng, 2003. "Bank Lending and Property Prices in Hong Kong," Working Papers 122003, Hong Kong Institute for Monetary Research.
  7. Jonathan David Ostry & Atish R. Ghosh & Karl Friedrich Habermeier & Marcos Chamon & Mahvash Saeed Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows," IMF Staff Position Notes 2010/04, International Monetary Fund.
  8. Garry J. Schinasi, 2004. "Defining Financial Stability," IMF Working Papers 04/187, International Monetary Fund.
  9. Jean Pisani-Ferry & André Sapir & Nicolas Véron & Guntram B. Wolff, 2012. "What kind of European banking union?," Policy Contributions 731, Bruegel.
  10. Morgan, Peter, 2009. "The Role and Effectiveness of Unconventional Monetary Policy," ADBI Working Papers 163, Asian Development Bank Institute.
  11. Jeffrey Carmichael & Michael Pomerleano, 2002. "The Development and Regulation of Non-Bank Financial Institutions," World Bank Publications, The World Bank, number 15236, October.
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Cited by:
  1. Dalla Pellegrina, L. & Masciandaro, D. & Pansini, R.V., 2013. "The central banker as prudential supervisor: Does independence matter?," Journal of Financial Stability, Elsevier, vol. 9(3), pages 415-427.
  2. Donato Masciandaro & Marc Quintyn, 2013. "The Evolution of Financial Supervision: the Continuing Search for the Holy Grail," SUERF 50th Anniversary Volume Chapters, SUERF - The European Money and Finance Forum.
  3. Oğuz Esen & Ayla Oğuş Binatlı, 2013. "The Minsky Perspective on Macroprudential Policy," Working Papers wp308, Political Economy Research Institute, University of Massachusetts at Amherst.

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