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Financial Stability and Monetary Policy

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  • Martin Hellwig

    (Max Planck Institute for Research on Collective Goods)

Abstract

The paper gives an overview over issues concerning the role of financial stability in monetary policy. Historically, financial stability has figured highly among central banks’ objectives, with policy measures ranging from interest rate stabilization to serving as a lender of the last resort. With the ascent of macroeconomics, these traditional tasks of central banks have been displaced by macroeconomic objectives, price stability, full employment, growth. The financial crisis has shifted the focus back to financial stability concerns. Along with these developments, the shift from a specie standard to a pure fiat money system has widened the scope for central bank policies, which are no longer constrained by legal obligations attached to central bank money. The paper first surveys the evolution of financial-stability and macroeconomic-stability concerns in central banking and monetary policy. Then it discusses two major challenges: (i) What should be done to assess the relevance of financial stability concerns in any given situation? How should one deal with the fact that systemic interdependence takes multiple forms and is changing all the time and that many contagion risks cannot be measured? (ii) What is the relation between financial-stability and macroeconomic-stability objectives? To what extent do they coincide, to what extent are they in conflict? How should tradeoffs be handled and what can be done to reduce the risk of the central bank’s succumbing to financial dominance?

Suggested Citation

  • Martin Hellwig, 2015. "Financial Stability and Monetary Policy," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2015_10, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2015_10
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    References listed on IDEAS

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    Cited by:

    1. Martin Hellwig, 2019. "Target-Falle oder Empörungsfalle? – Zur deutschen Diskussion um die Europäische Währungsunion," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2019_05, Max Planck Institute for Research on Collective Goods.
    2. Neyer, Ulrike, 2018. "Die Unabhängigkeit der Europäischen Zentralbank," DICE Ordnungspolitische Perspektiven 97, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE), revised 2018.
    3. sheunesu zhou, 2020. "Shadow Banking, Bank Liquidity and Monetary Policy Shocks in Emerging Countries: A Panel VAR Approach," Journal of Economics and Behavioral Studies, AMH International, vol. 11(6), pages 46-59.
    4. Martin Hellwig, 2018. "Bargeld, Giralgeld, Vollgeld: Zur Diskussion um das Geldwesen nach der Finanzkrise," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2018_10, Max Planck Institute for Research on Collective Goods.

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    More about this item

    Keywords

    financial stability; Systemic Risk; monetary policy; central banking;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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