Monetary policy and financial stability - a simple story

Abstract

The depth of the recent financial crisis in many economies has forced policymakers and researchers to rethink thoroughly the connection between monetary policy and financial stability. Many argue that central banks, because of their key role in the financial system, should assume greater responsibility in preventing financial crises. Before the recent financial crisis, a common view in central banking was that, rather than deliberately leaning against potential financial imbalances, it is better to just mop up after financial crises. Because overborrowing likely contributes to financial imbalances, many now welcome the emergence of an array of micro and macroprudential policies to limit borrowing. But neither such new policies nor monetary policy can be expected to completely rule out the possibility of a financial crisis.

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