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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.

Suggested Citation

  • José de Gregorio, 2012. "Price And Financial Stability In Modern Central Banking," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Fall 2012), pages 1-11, August.
    • Handle: RePEc:col:000425:010027
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
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    5. Acharya, Viral & Naqvi, Hassan, 2012. "The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle," Journal of Financial Economics, Elsevier, vol. 106(2), pages 349-366.
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    7. Luca Gambetti & Jordi Galí, 2009. "On the Sources of the Great Moderation," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 26-57, January.
    8. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-684, November.
    9. Howard Davies & David Green, 2010. "Banking on the Future: The Fall and Rise of Central Banking," Economics Books, Princeton University Press, edition 1, number 9154.
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    More about this item

    Keywords

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

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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