Lessons from the crisis : Monetary policy and financial stability
The article examines the link between monetary policy and financial stability in the context of the recent financial and economic crisis. It aims to draw lessons from those recent events and to examine the implications for monetary policy. More specifically, it asks whether, apart from its price stability mandate, monetary policy should play a more significant and pro-active role in safeguarding financial stability. The first section reviews the pre-crisis consensus on monetary policy. Economic developments in recent decades had shifted the focus of monetary policy to the link between price stability and economic growth, while the issue of financial stability had taken a back seat. In the prevailing macroeconomic context, known as “the Great Moderation”, a clear consensus on monetary policy emerged in terms of objectives, strategies and the institutional framework. Moreover, the dominant view was that monetary policy makers should take account of asset prices and other financial variables only in so far as they have implications for the future trend in activity and inflation over a period of approximately two years, typically taken as the relevant period for monetary policy. The monetary policy strategy of the Eurosystem is largely in line with this pre-crisis consensus. Unlike most other central banks, however, the Eurosystem has a unique two-pillar strategy in which the monetary pillar pays explicit attention to financial developments. Although initially aimed at identifying risks to price stability, it gradually focused more on aspects of financial stability. The second section draws a number of provisional lessons from the crisis. First, the recent crisis has provided evidence that price stability is not sufficient to maintain financial stability and macroeconomic stability in general. Second, not only has the continued firm anchoring of inflation expectations enabled monetary policy-makers to respond appropriately during the crisis, but it is also destined to remain one of the key elements of future monetary policy. Furthermore, recent research has revealed recurrent patterns which may help to identify financial vulnerabilities in the run-up to a serious financial crisis. However, it is still hard to identify financial imbalances in real time, and further research in this field is desirable. The debate on whether, in the future, monetary policy should make a greater contribution to financial stability and perhaps be given a broader mandate is still ongoing. However, some key points are already becoming clear. Financial stability should in the first place benefit from a strengthening of prudential policy, and particularly from the conduct of a macro-prudential policy. Moreover, a successful macro-prudential policy makes it easier to conduct monetary policy ; it prevents monetary policy from being over-burdened or confronted by serious policy dilemmas, so that it can continue to focus on the primary goal of price stability. In principle, this does not imply any significant modification of the existing monetary policy frameworks. Nevertheless, it is necessary that monetary policy takes full account of its impact on the risk-taking behaviour of the various economic agents. In addition, greater importance should be attributed to analysis of the formation of financial imbalances. That is not at odds with the priority of the price stability mandate, because the crisis clearly showed that risks to financial stability in the longer term also imply risks to price stability. However, it does assume an extension of the monetary policy horizon. If that horizon is actually extended, that should preferably be made explicit, as it would clarify the monetary policy strategy and increase accountability.
Volume (Year): (2010)
Issue (Month): ii (September)
|Contact details of provider:|| Postal: Boulevard de Berlaimont 14, B-1000 Bruxelles|
Phone: (+ 32) (0) 2 221 25 34
Fax: (+ 32) (0) 2 221 31 62
Web page: https://www.nbb.be/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Borio, Claudio & Zhu, Haibin, 2012.
"Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?,"
Journal of Financial Stability,
Elsevier, vol. 8(4), pages 236-251.
- Claudio Borio & Haibin Zhu, 2008. "Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?," BIS Working Papers 268, Bank for International Settlements.
- Dieter Gerdesmeier & Hans‐Eggert Reimers & Barbara Roffia, 2010. "Asset Price Misalignments and the Role of Money and Credit," International Finance, Wiley Blackwell, vol. 13(3), pages 377-407, Winter.
- Gerdesmeier, Dieter & Roffia, Barbara & Reimers, Hans-Eggert, 2009. "Asset price misalignments and the role of money and credit," Working Paper Series 1068, European Central Bank.
- Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
- Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
- Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
- DETKEN Carsten & SMETS Frank, "undated". "Asset Price Booms and Monetary Policy," EcoMod2003 330700042, EcoMod.
- Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 364, European Central Bank.
- 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.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, number 8973, 09-2014.
- Reinhart, Carmen, 2009. "The Second Great Contraction," MPRA Paper 21485, University Library of Munich, Germany.
- Svensson, Lars E O, 1999. " Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 337-361, September.
- Lars E. O. Svensson, 1997. "Inflation Targeting: Some Extensions," NBER Working Papers 5962, National Bureau of Economic Research, Inc.
- Svensson, Lars E.O., 1997. "Inflation Targeting: Some Extensions," Seminar Papers 625, Stockholm University, Institute for International Economic Studies.
- Svensson, L-E-O, 1997. "Inflation Targeting : Some Extensions," Papers 625, Stockholm - International Economic Studies.
- Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, 09.
- Olivier J Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," IMF Staff Position Notes 2010/03, International Monetary Fund.
- Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
- Annick Bruggeman, 2007. "Can Excess Liquidity Signal an Asset Price Boom?," Working Paper Research 117, National Bank of Belgium.
- William R. White, 2006. "Is price stability enough?," BIS Working Papers 205, Bank for International Settlements.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
- Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:nbb:ecrart:y:2010:m:september:i:ii:p:7-20. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.