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Should Monetary Policy Be Used to Counteract Financial Imbalances?

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The authors examine whether monetary policy should and could do more to lean against financial imbalances (such as those associated with asset-price bubbles or unsustainable credit expansion) as they are building up, or whether its role should be limited to cleaning up the economic consequences as the imbalances unwind. Effective supervision and regulation are the first line of defence against financial imbalances. An important question is whether they should be the only one. The authors argue that the case for monetary policy to lean against financial imbalances depends on the sources of the shock or market failure and on the nature of the other regulatory instruments available. To the extent that financial imbalances are specific to a sector or market and that a well-targeted prudential tool is available, monetary policy might play a minor role in leaning against the imbalances. However, if the imbalances in a specific market can spill over to the entire economy and/or if the prudential tool is broad based, monetary policy is more likely to have a role to play. In such a case, there may be a need to coordinate the use of the two policy instruments.

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  • Jean boivin & Timothy Lane & Césaire Meh, 2010. "Should Monetary Policy Be Used to Counteract Financial Imbalances?," Bank of Canada Review, Bank of Canada, vol. 2010(Summer), pages 23-36.
  • Handle: RePEc:bca:bcarev:v:2010:y:2010:i:summer10:p:23-36
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    Citations

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    Cited by:

    1. Bailliu, Jeannine & Meh, Cesaire & Zhang, Yahong, 2015. "Macroprudential rules and monetary policy when financial frictions matter," Economic Modelling, Elsevier, vol. 50(C), pages 148-161.
    2. Sami Alpanda & Gino Cateau & Cesaire Meh, 2014. "A policy model to analyze macroprudential regulations and monetary policy," BIS Working Papers 461, Bank for International Settlements.
    3. Denis Gorea & Oleksiy Kryvtsov & Tamon Takamura, 2016. "Leaning Within a Flexible Inflation-Targeting Framework: Review of Costs and Benefits," Discussion Papers 16-17, Bank of Canada.
    4. Paolo Gelain & Kevin J. Lansing & Caterina Mendicino, 2013. "House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 219-276, June.
    5. Mishkin, Frederic S., 2017. "Rethinking monetary policy after the crisis," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 252-274.
    6. Frederic S. Mishkin, 2011. "Monetary Policy Strategy: Lessons from the Crisis," NBER Working Papers 16755, National Bureau of Economic Research, Inc.
    7. Kozicki, Sharon, 2012. "Macro has progressed," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 23-28.
    8. Fredric Mishkin, 2011. "How Should Central Banks Respond to Asset-Price Bubbles? The 'Lean' versus 'Clean' Debate After the GFC," RBA Bulletin, Reserve Bank of Australia, pages 59-70, June.
    9. Dumitriu, Ramona & Stefanescu, Razvan, 2013. "Provocările politicii monetare
      [Monetary policy challenges]
      ," MPRA Paper 50261, University Library of Munich, Germany, revised 28 Sep 2013.
    10. Christopher Ragan, 2014. "What Now? Addressing the Burden of Canada's Slow-Growth Recovery," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 413, July.

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